Ep 54: The Government Deficit – What the Numbers Actually Mean!

About This Episode

The government deficit is at an all-time high and yet the markets remain strong. The economy is starting to bounce back after the pandemic stopped progress in its tracks for the past 6 months. So, what do the government debt numbers really mean? Are we stealing from future generations to solve today’s problems? Patti sits down with her Chief Planning Officer, Eric Fuhrman, to break down the very complicated concepts of deficit spending and the Federal Reserve into terms listeners can understand more fully. They discuss the two primary sectors in the economy – public and private and how mounting debt affects each. With the presidential debates coming in the next few weeks, this is the perfect time to learn and understand what these numbers really mean and how they affect our economic health and future.


Patti Brennan: Hi, everybody. Welcome back to the Patti Brennan show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Folks, here is the episode that you’ve been waiting for.

We’re going to be talking about the government debt. Just what you wanted to hear about, right? My goal in this episode today and the one that’s going to follow it, is going to be talking about the Federal Reserve. We’d like to take some very complicated concepts and a very complicated subject and break it down into terms that you can understand.

I’m hoping that by the end of all this, you come out of this with a better understanding of how the government works with the Federal Reserve because we certainly have seen that during this crisis with the coronavirus. I just want to boil it down and give you a little bit of perspective and understanding of why they might be doing some of the things that they’re doing and what that might mean.

In yesterday’s “Philadelphia Inquirer,” the headline read, “Government deficit shatters the one-month record.” In the article, goes on to report that about 10 years ago, the deficit for the month of June in 2019 was $1 billion. In June of 2020, it has skyrocketed to $864 billion in one month. The question is, are we robbing future generations in almost assuring bankruptcy for our children?

Joining me today is the Professor. It’s who we call Eric Fuhrman. Eric is just a student of this stuff. He is so articulate. He’s got such a good grasp and an understanding. Between the two of us, we’re going to banter about and really boil this down in such a way, hopefully, that’s going to make some sense.

Eric, let’s tackle that first one. What do you think? Are we really being irresponsible with the deficit that we’re adding on top of the debt that the federal government already owes? It’s pretty crazy.

Eric Fuhrman: That’s a deep question. I’d like to have a lighthearted moment with you first, which is, how is it that you and I keep getting topics like this over and over again? Income taxes, estate planning, social security. Now, the national debt. All the fun stuff.

Patti: Hopefully not.

Eric: We try and make it exciting, right?

Patti: Exactly.

Eric: That’s the hope for the people there. To answer your question, yes. It’s only human nature. Anything that seems large, big, unknown, what other feeling would you have other than to fear what you don’t really understand or what you don’t know

Patti: Especially when you’re comparing it to a deficit 10 years ago, that was a billion dollars versus over $700 million. We’re talking one month, Isn’t that scary? Should we be afraid?

Eric: Yeah. What I think is important for people out there, regardless of how you get your information, maybe it’s print, maybe it’s TV and so forth, is to always remember you’re getting data points but you’re not getting all the data points. You’re not getting the whole story.

To look at the deficit of last year versus the deficit of this year, I think the Bureau of the Fiscal Service publishes the monthly borrowing of the Treasury, borrowing or surplus. It’s a very, very volatile number. You see these wide differences, but you really have to take it in context of a much broader picture.

I hope what we’re able to communicate here to our listeners, is really to dispel some of the myths. More importantly, when you have education, when you have understanding of something, then I think it becomes less scary. Hopefully, we’re successful in doing that today.

Patti: I think it was Brian Wesbury. He had a blog. I love Brian Wesbury. He just writes so well. The headline was, “Coronavirus, it’s scary but is it dangerous?” He goes on to really explore that concept. It is scary, but is what is going on actually that dangerous, as it relates to the economy, the markets, etc?

Is the response that the government has really had to embark upon, does it necessarily mean that income tax rates are going to have to skyrocket, inflation is going to get out of control? Are we in fact, robbing the future for our children?

Eric: I think that’s an important distinction. When we’re talking about the government response here, we’re talking about the fiscal and economic response that they’re engaging in. I think what we have to explore first, is the predominant view. It’s almost orthodoxy amongst politicians and the public, that the US government debt is this bad thing.

This looming thing that is a great burden, that eventually has to be paid back, that eventually by spending profitably today, we’re essentially robbing future generations, and they’re going to be stuck with a bill.

Patti: I’m going to stop you right there, and what doesn’t help are the headlines and the newsflashes that basically just give you our national debt. It just ticks up, and up, and up every single second, and it just makes people feel that much more uncomfortable.

I think that one of the things that we had talked about, and not to steal the thing, I think the newsflash that we’re going to get from this, the bottom-line to this is, it might not be as bad as you might think, right?

Eric: Yeah, absolutely. I think the first observation you have to make is that the government, just like businesses, are perpetual. They don’t have an infinite life…I’m sorry, they don’t have an end like we all do. Our life is finite. These institutions aren’t, so I think that’s first to keep in mind.

Also, when you talk about the size of the debt, people have to realize right context here. The economy is phenomenally bigger today than it was in 1990, 1970, 1940. We exist now in what’s called basically a fiat or a credit-based system.

As credit expands, when economic activity expands, the debt is going to naturally expand as well. It’s a first important distinction that people have to have.

Patti: Let’s talk about how the federal government manages its finances, and compare that to how we manage our own finances. If I were the financial planner for the US government, I’m not so sure that I would feel that great about the debt.

Now, let’s talk a little bit about, does the government pay off the debt? Should we be paying it down? What is this thing that’s referred to as this thing, this fallacy of composition, that the government should be managing its finances like you and I do? Why is that a fallacy?

Eric: I think that’s an interesting point. I think part of the public’s bewilderment over the debt really stems from what you’re describing, that there’s this parallel that’s drawn between government finances and that of an individual household.

We all recognize that we should…Judicious financial management is to save, to basically invest wisely and not engage in unprincipled behavior. We take that and say, “Well, the government should do the same thing.”

That’s a fallacy of composition to assume what is good for the individual is good for the nation as a whole, and I think that part of the misunderstanding is that that’s not how it works. What’s good for you and I is not good policy at the national level.

Part of this understanding that we’re going to explore is, there’s really two primary sectors in the economy. There’s the private sector, which are basically households and businesses, and then there is the public sector, which is the government.

We’re going to get into that a little bit more, but I think that’s the biggest thing that people have to understand, those two distinct sectors in the economy.

Patti: I think that the myths and the misperceptions of how all of this works is an important thing we want to clarify. Let’s talk about the Fed and the government, and how the balance sheet works.

When you and I look at a balance sheet, we’ve got the liabilities, but when we’re working with a client, we’re not just looking at the liabilities. We’re looking at the assets as well, so what is missing in all of those headlines?

Eric: That’s an interesting point. I think you put up the picture of the national debt clock, that everyone knows what that is, and it shows your family share of the national debt.

You make a great point. There is this myopic focus on the debt, but why would you not ask the question, “Well, what are the assets?”

Every liability has an asset somewhere in the financial system. We would never look at one of our clients and only look at the mortgage, and not consider the collateral, the home that secures that mortgage.

I think what’s important for people is to understand what are the assets of the country. You really have to consider the other side of the balance sheet, which is far more important for that matter.

There’s various ways you can calculate this, but the Federal Reserve puts out every quarter what’s called the Z1 report. This is a reconciliation of the country’s finances.

What you would find, and I believe this is at the end of 2019, is that the household sector of the United States has over $117 trillion of assets. These are physical things, buildings, structures, equity, $117 trillion. When you consider the national debt, there’s about, I don’t know, roughly five times more assets than there are debt.

Patti: Yeah, I mean if that was a home or any other kind of debt, that’s a pretty good debt to equity ratio. Let’s kind of take a step back, and really think about an important principle that I think so many people kind of miss, and that is something that Abraham Lincoln said in his Gettysburg Address.

What he said was, “We are a government of the people, by the people, for the people.” That’s really important because, when you bring up the government debt and then you talk about the household assets, why are we adding in the household assets?

That’s because we are the United States of America, we are owners, if you will, of that debt one way or the other. When you think about a treasury bond, and let’s really simplify this for everybody listening, because it was the only way I could get it, Eric.

We’re simplifying here for Patti Brennan, and then hopefully, it’ll help everybody listening today. When the government has debt, what is that? Basically, it’s treasury securities. What they do, very simply, is they issue a bond, bond represents debt.

If I, Patti Brennan, buys a $10,000 treasury bond or if I buy a mutual fund that’s treasuries or government debt, I have lent the federal government $10,000 and they’ve got the cash, and I have the security, so literally I have an asset that is part of my net worth.

Over time, the federal government is going to pay me interest, every quarter, what have you, and at the end of the term, they’re going to give me my money back. That’s the way it works, so you know to a certain extent. The government really owes the money to us, the citizens.

Eric: Right. Yes. Essentially, the interesting observation from what you just described is that we both owe the debt and we own the debt, right?

Patti: There you go.

Eric: That’s an interesting concept to think about here, but really what you’re kind of describing is, basically, the auction process of how does the government issue debt? When the government decides to run a deficit, which they pretty much have since the 1950s, there’s been very few times where there’s a surplus, they have to close the gap. What do they do?

The treasury then will sell securities to a network of dealers, and those dealers then sell the bonds to individuals, and so forth. Think about the transaction that’s happening.

Basically, the government will sell a treasury bond, the owner of the bond will now have an asset. The government records a debt, one offsets the other. And the government receives payment.

They take cash from the person that bought the bond. Now the government spends the cash which goes right back into the financial system, just in different accounts. The recipients of whoever invoiced the government, employees, whoever it might be.

Essentially, there’s an equal and corresponding asset and liability, one in the private sector, one in the public, and the cash in the system has not changed. There’s been no printing of money that’s occurred.

Patti: That’s really interesting. You’ve brought up a really important point, and it goes to this kind of idea of the spending, and how the government uses the money. Again, the government gets money different ways.

It gets money from taxes, part of what I think the reason why the deficit was so high in June is because, guess what, those of us who owe taxes didn’t pay them April 15th. We got an extension. The April 15th is going to be in July. That’s number one, but also, they issued that debt.

What happens is they pay that interest. It goes into our pockets. Then we have it to spend or to invest. Those are, basically, the only two things that can happen. When the government spends money, they are either using it, it’s an expense, to hire people to work for the government.

One person’s expense is another person’s income. Very important. One person’s expense is another person’s income. Yes, they’re spending it, but if they spend it to judiciously, I can’t say that word, Eric. You say it much better.

Eric: Judiciously.

Patti: If they’re smart with it, let’s say that.

Eric: That’s good. I like that. We’ll go with that.

Patti: If they’re smart with it, what they’re doing is they’re keeping people employed, or they’re using it to purchase things to support the military, or to provide services for its citizens, because again we are a government of by and for the people. The government is there to provide relief, service, protection to the citizens. They do that by spending money, employing people, etc.

Eric: Right. Yep. Absolutely. I mean they do all kinds of things in terms of the research that they provide, employment in all kinds of various industries. They’re doing, in a lot of cases, there’s plenty of criticism that there is fraud and waste that occurs. There’s no doubt about that.

Patti: I was going to say that too. When we talk about spending, and this is where the politicians get involved, and this is really an important topic as we get into the election. It’s not to say that there’s an endless amount of spending that the government can do, and there is responsible spending that really helps the economy. It juices things up, creates demand where it doesn’t exist, and it supports people who really need the support.

Eric: Absolutely. I think the government does things, big things, that would be difficult for any individual or single private company to do on their own.

Patti: Yeah. Let’s talk about that, Eric, because I really like that point that we were talking about before, because there’s two things you can do with money. You either spend it or you invest it.

Eric: Right.

Patti: Let’s talk about the investment that any government makes. It can invest in transports, roads, bridges, trains. It can invest in the electric grid. The goal there, always, the goal for a government is to increase output. That’s their bogey. They want to increase GDP, that’s it. That’s how they get measured.

We need to have growth in the nation to keep those assets building, because as long as we can have growth, the assets will grow in value, and the value of the debt, especially given today’s interest rate environment, becomes less of an issue.

If they’re frivolous, if they are wasteful, and we’re not investing it to propel innovation and ease of use, ease of business, etc., then it’s a waste, and it doesn’t help GDP.

Eric: Right, so that’s an interesting concept. If the government is running up debts, and they’re using that money on unproductive things, on subsidies or special interest, things like that, that are not going to provide a productive return to society, that’s wasteful.

That’s not good spending that invests in our future. As you point out, what’s interesting is that we record the revenues, the spending, and the result in deficits, but the government makes very large investments. Think about the international highway system.

This is a significant investment that lowered transportation costs, made the entire economy far more productive because of the ease of moving goods and services, from coast to coast, and into the interior of the country. That’s how many of these cities blossomed.

Patti: It’s really interesting. When we were comparing, I love the comment that you made Eric. It said something like, imagine at what life would be like if we were still on horseback.

Eric: We wouldn’t be nearly as productive as we are today.

Patti: Exactly.

Eric: We wouldn’t have the standard of living that we have today.

Patti: That’s the goal, is to increase standard of living. It was also interesting, the way we look at it. Spending improves our standard of living today. Investment improves our standard of living tomorrow.

Eric: Yes.

Patti: That’s how the government hopefully is and should be looking at this. The spending that’s happening now, again, bring it back to today with COVID, they’re spending a lot of money to improve or support standards of living today.

Right now, again, incomes went down, unemployment was huge. How are we going to keep these people afloat? The government steps in unemployment benefits, plus $600, etc. Right?

Eric: Right. I think you make an important point too. Just on the last one about the investment, the interesting thing is that we see what the government spends, but we never calculate into that the return on the investment, the highways, the airports, the bridges, and those things.

Ultimately that gets expressed in basically the private sector, the increase in wealth that we all enjoy because now we can be more productive, live better lives, and so forth.

Patti: Which is why GDP is the measurement.

Eric: Exactly. I think there’s an interesting segue here into times of crisis. How can government debt be helpful? I think that leads into another one of this wonderful fallacy of compositions, what John Maynard Keynes, the famous British economist called the paradox of thrift.

When you enter periods like COVID for example, it’s enormous, unforeseen, enormous shock to the system. We have to think we’re all human beings. We all have the innate response for self-preservation. Economically, what does that mean? That means that basically, we’re going to save.

We’re scared. We don’t know what the future holds. We’re going to save as much as we can. We’re going to try and pay down debts.

Patti: We’re not going to spend it. We’re not going to do what we would normally do. We see that on a micro level right here. People change their plans and say, “We’re not going to do this renovation.” We’re not going to do these things that we were thinking about doing because we’re worried. We don’t know what’s going to happen.

Eric: Yeah. I think about how many clients that we’ve talked to, where they’ve received maybe a stimulus check, or they just said, “We’re just not spending money because we’re not going out and doing the things that we do.” Think about this on an aggregate level.

The idea behind the paradox of thrift, is that individual savings is good, but when everybody does it, it’s bad. Right back to your point, that one person’s expense is another person’s income. When people stop spending, what happens is all of that savings, that money, essentially becomes trapped in the banking system, in the financial sector.

All of a sudden demand starts to contract, financial assets go down in value. Eventually, you’ll have a domino effect of bankruptcies that emerge until the system just completely clears itself out, which is bad. That’s the stuff that happened in the Great Depression.

Where government debt can be very useful is that in these times, the government is the spender of last resorts. What they’ll do is run humongous deficits that will require them to sell treasury bonds. If you’re an environment of great fear, what do people want? They want a safe haven, a risk-free safe asset.

What do you know? What’s the best performing asset class this year? Long term government bonds. They’re up phenomenally. Essentially, what the government is able to do by running deficits and selling those treasuries, is that they are able to extract that savings that is trapped in the banking system, and then spend it in the economy.

They’re essentially trying to make up for the lack of demand because consumers are not spending. Ultimately, that will hopefully soften the landing, arrest, the decline in asset prices, and hopefully reinvigorate the economic engine again to get people spending and borrowing.

Patti: It’s so interesting. I think it’s fascinating how the government basically can monitor that, and basically come in where the consumer has left. The consumer to your point leaves two ways. They stop spending, they pull in, maybe stop paying their mortgages and things of that nature, making the banking system more fragile, etc.

Although sidebar, I think it’s very interesting to see how well the banking system has performed, passing the stress test. The legislation that was passed after 2009 really was effective. The banks know that they’re going to be monitored, and that whole thing has to continue. They’ve got to remain solvent.

The bank’s role really is to lend the money out. The whole idea of the banking system is to put money, literally cash into the hands of individuals and businesses in the forms of loans for them, to give people a bridge to get through this crisis. Right?

Eric: Yeah.

Patti: I think it’s also important to point out to everybody listening because I know that this is a heavy subject. It’s one filled with lots of fear. When we think about that huge rise of the debt, we have to understand that the debt really never gets paid off. To use a quote that you had shared with me, a rolling stone gathers no moss, so that it just continues to get rolled over.

The real expense for the federal government is the interest on the debt. When you compare the amount of interest that the federal government is paying on that debt, it’s actually lower than it was in the ‘80s and the ‘90s because interest rates were much higher.

Eric: Actually, to go back on that comment, I think in central banker speak they would say, “A rolling loan grows no loss.”

Patti: Ooh.

Eric: That’s how they would modify it probably.

Patti: That’s interesting.

Eric: As long as you can rollover your debt, then you never have an issue.

Patti: Let’s talk about that part. We can say, yeah, the federal government can spend and spend, and support and support, and do all of that wonderful stuff. What could happen, Eric, in terms of, what’s the downside to this? Ultimately, for example, could the debt be called?

Could people stop buying it? Ultimately, we’re only as good as the confidence that people have in our ability to pay it back. Right?

Eric: Absolutely. I think the United States when it comes to the debt, would never have a problem of insolvency. We think about ourselves, an individual can certainly become insolvent. You could run out of money to keep supporting and paying your debts. That’s how you become bankrupt.

The United States is unique. It doesn’t have that problem. We have an independent monetary authority called the central bank, and they have a monopoly power over printing money. In our case, the Federal Reserve can create an infinite amount of money. There would never be an issue of never having enough dollars.

Really the problem that you would have would be one of confidence. You see this and other governments, Zimbabwe, Argentina, there’s other serial defaulters in the world that are a great examples. It would ultimately be one of confidence where there would just be such mismanagement by the monetary authorities or our elected officials.

That would be the thing that would be problematic, in terms of the debt. It would never be an issue that there wouldn’t be enough money to pay it.

Patti: It’s interesting. I guess it’s hard to go bankrupt when you owe the money to yourself, right?

Eric: Yes. That’s an interesting concept. It’s a little bit hard to wrap your mind around, but yes. Essentially, we are the ones that own the debt and we owe the debt.

Patti: We’re going to get into that in a little bit of detail in a minute. I know you guys who are listening to this, or watching this or thinking, “Well, wait a minute. We don’t own all of the treasuries out there.” You’re absolutely right.

The United States, the citizens of the United States, via either mutual funds or individual bonds, or through especially institutions and especially pension plans, own 64 percent of the debt. Who owns the rest? It is other nations. All right. Since I brought that up, I’ll bring Abe Lincoln in a little bit later. Actually, can I just tell you about this Abe Lincoln? I love this quote.

Eric: Yeah. Sure.

Patti: Let’s just do this.

Eric: He had many great speeches in history that are just timeless.

Patti: It’s just crazy that he was so smart. It’s just crazy, way back when he really understood something, that we really didn’t get our arms around until after the depression, and the mistakes that were made during the Depression. What he said was, “The great advantage of citizens being creditors as well as debtors, with relation to the public debt is obvious.”

Men can…and sorry, men and women. He said, “Men can readily perceive that they cannot be much oppressed by a debt, which they owe to themselves.” I thought that was really fascinating even back then, as they were fighting the Civil War, and financing all of that, and we got into World War II.

Again, we go through all of these crises. If you listen to the last podcast with Brad, we talked about this. It was, every time we go through one of these things, we learn. We learn what worked, we learn what didn’t work, what was OK, or how we could have gotten out of a crisis.

We’re going to go through a crisis. It’s just the human element and the human nature. What tends to get us out of it faster without as much moral hazard as other situations…again, moral hazard. People are out there talking about this unemployment benefit, where two-thirds of people were receiving unemployment in America today.

Two-thirds of those people are making more than they would have when they were working, because of the extra $600. I

Eric: It’s interesting. I thought it would it would be 50 percent.

Patti: Nope. It’s two thirds. What’s happening is the moral hazard of that is, as we get into this crisis a little further, these companies are saying, “OK. Time to come on back. Time to come on back.” These people are thinking, “Well, I don’t know. I like this whole thing. I’m making more money. I don’t have to go into work. I don’t have to worry about my kids. This is a pretty good deal.”

Again, it’s temporary. Does it create a moral hazard, etc.? Again, I just think it’s fascinating in terms of how all of these sloshes around the system, what it leads to in terms of behavior, whether it be on an individual level or a company level, what they did with the PPP loan. Hopefully, that is forgivable for many.

For a lot of businesses, that PPP kept them in business. That’s important because we need businesses to provide goods and services. When demand comes back, if so many companies go out of business, we don’t have the people when the businesses to create the goods and services.

We have all of this cash chasing even fewer goods, and guess what happens? Inflation goes nuts. That’s what happened with all those governments. We need businesses. We need to keep people afloat. Those businesses are keeping people employed.

Those people who are employed then get the money. They get to pay their mortgages, they get to pay their bills, etc., and commerce continues to go on. It’s not going to recover overnight. We talk about Vs. We talk about Ws.

We don’t know. We don’t know whether we’re still in this recession or not, but the stock market, and we’re not going to talk about the market, seems to think that we’re going to get out of this thing pretty quickly. Who knows?

That’s not what we’re going to be talking about today, but it does make me think that the government may not be as clueless as a lot of people might think, right?

Eric: Right. It’s easy to bash them, though.

Patti: Oh, absolutely.

Eric: It’s a little bit fun too sometimes.

Patti: Yeah, yeah, yeah. This patsy driving is the best. They are nothing like…

Eric: I mean, come on.

Patti: Yeah. Why not?

Eric: It’s like a pastime, right?

Patti: Right, absolutely. Absolutely. Let’s go back to this paradox of thrift.

Eric: Yeah.

Patti: It just doesn’t sound right. I thought it’s good to save money, Eric. Why isn’t it good for a nation to save money? What is the economic outcome if everybody just pulls back, puts money into the bank, and doesn’t invest it, just let’s it sit there? You mentioned it’s trapped in the banking system. Why is that so bad?

Eric: I would say it this way. We can’t save our way to prosperity. You just can’t. We’re in a system that is based on the expansion of credit. You always have to keep expanding credit, and keep issuing loans.

Patti: I’m going to play devil’s advocate, Eric, because that sounds bad. Why are we expanding credit, because that means more debt? More debt is bad. Why does it work that way? I know the answer, but I want you say it.

Eric: Gosh, I don’t know. I would say that the reality is right. Ultimately, what’s a loan? It’s a financial asset for the bank, a liability for something else. Essentially, what we need, what banks do, they utilize the pool of savings, people out there that want to save and want a rate of return on their money, and then they essentially take that and make loans to good risks, to good ideas.

Ultimately, what does this do? It brings together all what we call the factors of production. Land, and capital, and all these things, and essentially, all that leads to greater output. We measure our standard of living by the size of our output. The more output is growing, that means the pie is growing, the economic pie is growing and everybody is better off for it.

If you look back from the 1950s, the ‘70s, and so forth, standard of living continues to rise, because people are being more productive. There’s more output now, and it’s more efficiently produced than it ever was at any point in the past.

Credit is really that way to access the savings that people are taking today and make those investments in the future that will lead to greater prosperity.

Patti: I think it’s also interesting, when you look at that, the interest on the debt, whether it be the government debt or what have you. Even though we have a lot more debt and the government is paying the interest on that, when you look back at the ‘80s and the ‘90s, and they were paying a lot more on an annual basis than we are currently, the ‘80s and ‘90s were one of the greatest periods of expansion in our nation’s history.

It’s not the debt, it is the servicing of the debt and how it’s being used. If we expand credit, the goal there doesn’t always happen, because you can loan money to a business for an idea that they have, and the idea may not work out. Over time, some ideas work out great.

Look at Tesla, for example, and look at what Tesla is doing with the space program. You might wonder why in the world do we care about a space program? It’s not landing somebody on Mars, it’s the technology that’s developed to create the opportunity to land somebody on Mars, and then the application of that technology in life here on Earth.

The Internet was spending through the Pentagon. That was government spending that created the Internet, that gives us access to information that we never would be able to access, to put together a podcast like we are today. How about that?

The whole idea of credit, I can’t build a company overnight unless I have money. I can’t hire people. I can’t provide good benefits. I can’t attract them. I can’t build a factory unless I have capital. A bank lends me the money with the idea that I will create a company that’s profitable enough so that I not only can pay the bank back, I will also pay employees who will then use the money that they’re earning to pay taxes, works it way back into the government.

We can talk about a lot of things today, but how all of that works. Then it circulates back in other ways. There are so many things that are going on, and it’s not all bad.

It does take money to create money. That’s the whole concept of allowing credit to expand, because it’s been shown over a hundred years of our nation’s history that expanding credit increases the net worth of our nation.

Does it do it evenly? No, and we’re seeing that. There’s a separation, the rich versus the poor, and more is going to the wealthy. Truly, that’s probably… We can get into philosophical, and the tax system, and moving the wealth from the very, very wealthy to people who are struggling, etc. That’s another concept.

We are a nation of, by, and for. That’s just to keep that principle in mind as we go forward. We might be idealistic when we talk about this, Eric. I think that it’s OK to do that. I think that today, I want to just drive home the point as we go into this election, that the government is there to support all of us, the people.

Some of us have been blessed and we are so grateful, and yes, we pay a lot of taxes, and that tax money isn’t always used the way we would love it to be used. There are judgments sometimes we may or may not agree with. Eventually, it circulates through the system. It keeps the economy going. Right now, it’s more relief, and eventually, it will help it to grow again.

What have I missed?

Eric: I think that about covers it for Podcast 1, and then the Podcast 2. [laughs]

Patti: Oh, you know what, Eric? Timeout.

Eric: Yup.

Patti: We got to do one more thing. Sorry guys who are listening. I promised you we would get into the government debt and the fact that the foreign ownership is up. Let’s nail that one, Eric, because that’s important.

People always talk about China owns so much of our debt, and Japan. Actually, Japan owns more of it. Japan owns seven percent. China owns six percent. Other nations own our debt. Can you, for our listeners, explain how do they get our debt? First of all, why would they get it? How does all of that work?

Talk a little bit about the trade deficit and how that works, and how they get the dollars in the first place. You and I can chime back and forth in terms of what the different ways that they can use that dollar.

Eric: Maybe the best way to frame it is why wouldn’t you want to own it. Let’s talk about…As an investor, we want to find safe, high-quality assets that we can buy that will provide an expected return. Treasuries do that in a great way.

What are the mechanics of how foreigners accumulate so much debt like China and Japan? Let’s form the linkage here with what you might be hearing in the public discourse, which is trade deficits. We hear all about trade deficits.

If Walmart says to a Chinese manufacturer, “I’m going to place an order for $10 million of stuff, junk,”

Patti: Widgets.

Eric: Or whatever. I shouldn’t say junk. If they are going to buy $10 million, they receive the goods. The Chinese exported it. What do they receive? They receive payment in US dollars. That leaves them with a limited set of choices. What are they going to do?

Now they hold US dollars. They really only have a couple of choices. The can just leave it in an American bank…

Patti: Wait, timeout. Very important, and this is one that…Keep it simple. They hold US dollars. Remember, it’s China. They can’t use US dollars in their economy. It is not their currency.

Eric: Yeah. A great example would be this week when you do your grocery shopping, bring a stack of Japanese Yen with you and see if they take it as payment for groceries.

Patti: Perfect example, exactly.

Eric: They’re going to look at you funny and be like, what is this.

Patti: Exactly.

Eric: Yes, you make an excellent point. Those dollars can only be spent in the US financial system. They don’t go abroad and things like that. Maybe in the black market, people with suitcases of money, that might be true.

In any event, on an international scale, when you run a trade surplus with another country, you accumulate their local currency, their domestic currency.

Patti: By the way, let’s stop here. The trade deficit has run between what, two and five percent since the ‘70s. Something like that.

Eric: Yeah, I think so. It was really big back prior to the financial crisis. Now it’s come back in line with the historical two, three percent.

Patti: Yeah.

Eric: Basically, if you are a foreign exporter now holding US dollars, what are you going to do? You can leave it in cash, which is not productive. We would never leave anybody’s money just sitting in cash.

Patti: It’s dead money.

Eric: Or you can invest in US financial assets. You can buy stocks. You can buy bonds. You can buy real estate. What do most people do? The buy US government Treasury securities.

Patti: OK, let’s talk about that. They buy stocks, that’s not bad, because it makes our stock market go up.

Eric: Demand for our assets, right.

Patti: They buy bonds, I guess that’s not bad either, because as they buy the bonds, interest rates go down, so that’s a way of keeping our interest rates low.

Eric: Right.

Patti: They invest it in land, or BMW buys a factory and builds a factory down in South Carolina. Not a bad idea either, right?

Eric: Yeah. I think there is a…Prior to China, remember, there was a time when people thought Japan was going to take over the world, and there was these big stories about Japanese investors buying landmark properties in New York City. They even bought Pebble Beach, and I think they paid over $800 million.

Ultimately, they overpaid for all these assets, because Japan was going through a tremendous bubble at the time. Ultimately, foreigners have US dollars, they have to spend it in the United States. They can buy our goods and services. They can buy our assets, physical or financial, but if they don’t like any of those choices…

Patti: Let’s go buy goods for services. Let’s say they buy something from Walmart. That puts the dollars right back into our economy, and Walmart gets the money to pay the employees, yadi-yadi-yada. I’m just trying to bring home the point that the foreign ownership of our dollars isn’t necessarily a bad thing, because eventually, we benefit from it, right?

Eric: Right. They can buy our goods and services. Think about a German car manufacturer. BMW builds a plant in North Carolina. What does that do? That provides employment. I think there are something like over seven and a half million jobs that are created by foreign direct investment, where foreign investors invest here in our country and so forth.

Keep in mind, the dollars that they accumulate because of trade surpluses have to be spent here in the United States. They could always say, “I don’t like the dollars. I’m going to go to the euro,” but guess what, they have the same set of choices in the European currency. Or if they go to Japanese yen, they have the same set of choices within Japan.

If they decide, “I don’t like any of those, I’m going to bring the currency back,” what does that do? That means they’re selling dollars, which depresses the exchange rate and makes US foreign goods more competitive on the world market.

Patti: They don’t want that either.

Eric: Yeah. They haven’t done that, right? So, yeah. No.

Patti: Right. That’s interesting.

Eric: Remember the Big Mac Index that we looked at?

Patti: Yeah.

Eric: When you look at that, “The Economist” publishes this to give you an idea of how undervalued or overvalued currencies are relative to the dollar, because a Big Mac is a homogeneous thing, unless you’re getting one in India, because they don’t use meat there.

Otherwise, the Big Mac is the same, same ingredients no matter where you go, so it should cost the same once you convert your currencies, but the reality is the interesting part about the Big Mac Index is that they don’t.

This is playing on a concept called purchasing power parity, which says the same thing should cost the same amount in the foreign currency once you convert it. They don’t. You see places like the UK, China, their currencies are massively undervalued, based on this Big Mac Index. It’s an interesting little way to look at it.

Patti: Fantastic. This is really feeling good. I’m getting it. Let’s pull all this together. To summarize, when you hear about the rising debt, we’ve always got to remember that there are assets to offset that liability. $117 trillion to offset $26 trillion, that’s a pretty good ratio.

We also have to keep in mind that the interest is really what the government has to be concerned about. Can they maintain the interest payments on that debt? In fact, it’s lower than it was in the ‘80s and ‘90s because of interest rates.

Eric: What I would say to that point too is keep in mind the interest is not really an expense. There’s all this talk that the interest rates will go up and interest will become this unsustainable burden and crowd out other spending in the government budget, and so forth.

Interest is not a government expense. They are simply taxing us, you, and me, and everybody else, but what do they do? They return that money right back to US citizens that hold Treasury securities, and those citizens determine what goods and services that they will spend that income on.

The government, it’s not like other expenses where they determine what they’re going to buy or invest in. The interest just comes into the Treasury and goes right back out to the holders’ pension funds, which pay pensions to millions of Americans.

The interest isn’t really necessarily the kind of expense that you would normally think. It comes in from all of us and goes right back out to those of us that have bonds, or pensions, or rely on some kind of fixed income.

Patti: That’s a really good point. That’s a really important point. We got that. Assets and liabilities, interest on the debt is the most important thing to look at. Deficits of between two and five percent of GDP have occurred since the ‘70s.

Eric: When you think about that, the question I always ask in my mind is why? Why do we always have these persistent deficits all the time? I don’t know if this is the answer. I just anecdotally thinking about it is there’s a large swathe of the electorate that wants fiscal discipline and tax cuts.

There’s also a large swathe of the electorate that derives benefits from social programs and government spending. The reality is if you’re going to have a balanced budget, those two things are mutually exclusive. You can’t cut taxes and spend more.

As much as politicians might loathe the idea of running government debt, the reality is the government debt is a convenient way to have both at the same time, where you can cut taxes, you can spend, and what do you do? You finance it by borrowing from American citizens who a large proportion of them want a safe, secure financial asset that they can use to build their household savings.

Patti: I think you had said another conversation, when you compare the US Treasury market to any other market, first of all, it’s huge. It is much bigger than the stock market. It trades very easily, and it’s transparent, and it’s backed up with one of the strongest, most resilient economies in the whole wide world, so it’s trustworthy. That’s why people want it.

Eric: We may talk about this in the next podcast, but there’s always this notion that we have the world reserve currency. I think people have it a little bit backwards. We have the world’s reserve asset. We have the premier financial asset that the globe wants, which is basically US Treasury securities, one of the largest, deepest markets in the world, as you said, backed by the highest quality revenue stream.

People across the globe don’t accumulate dollars because they want US dollars. They accumulate dollars because they want the Reserve asset. Their holding of dollars is just a byproduct of that desire. As money moves fluidly throughout the economy, people are making transactions, there is a huge portion of that money that always seeks a safe haven, somewhere at the end of every day.

The system, it’s beautiful. Every day, it balances, and there is always demand for that safe asset, which is the deepest liquid market in the world, US Treasury securities.

Patti: I think also, to drive that point home, larger deficits coincide with slower economic growth, not spending. When you look at the charts, the graphs, all that kind of stuff, the bigger, larger deficits like right now, we just talked about that headline, it’s because the economy has been shut down and growth has slowed. It’s contracted. We’re negative now. Negative GDP. It tends not to coincide with greater spending. I think that’s really interesting.

We’ve got that. We nailed that one. I think the most important, and I think the other thing is, and I keep on talking about Abraham Lincoln, just because I love him. We are a nation of the people, by the people, for the people. It is hard to go bankrupt when we owe most of the money to ourselves. That’s the purpose.

We’re getting back through the debt. I think we have to be smart about the way it’s being spent and/or invested. That’s really where you hear the bantering. We are a very wealthy nation. We are so wealthy. I think that that’s something that we should all be happy about, proud of.

It’s difficult a period of time, we’re going to get back to growing one way or the other. It’s going to come down to the virus, getting a vaccine. Here is that public-private partnership working very, very well. The government is funding these pharmaceutical companies, giving them money to do the research to get this vaccine faster than anybody dreamed possible.

Our government has made the decision to use some of our money, through debt, to give it to these pharmaceutical companies, to give them the incentive to say, “Work on this vaccine. We’ve got your back, and keep your employees working, and we got to find a solution.”

Again, it’s like the war bonds all over again when they issued war bonds to get us through war, too. This is not necessarily a discussion on public policy, although it just turned out that way. [laughs]

Eric: Did we just fall into that? Oopsie.

Patti: Yeah. We did. We did. It is not intended to be political commentary. I think it was just really important for you and I to lay it out, hopefully, in simple terms that people can understand, that there really is a lot of thought that’s being put into this stimulus program that the government has approved.

Again, we got to understand that when you think about any kind of program, the fact that Congress and the Senate, collectively, every single individual approved the Cares Act, except for one person, that’s crazy. To put that in perspective, these people understand that, that kind of…what was it? Two, four, whatever trillion dollars that they have committed over and above.

Back in the financial crisis, it was $800 billion. This is a big deal, right?

Eric: Right.

Patti: They did it like that within a week. Again, time will tell how it was spent, what it was being used for, lots of complaining, etc. I understand that. Yes, I wish everybody could get tested. These long lines are ridiculous. Was it perfect? No. Again, over time, they’re going to get it right, or at least we can hope.

Eric: I would say, if you look at the history, history provides a litany of examples of policy mistakes and times when the government didn’t step in, in a big way. Bank panics were far more frequent in the 1800s and early part of the 19th century than they are today.

A big part of why they aren’t there is because, you’re right, of the regulations and the improvements in the central banking, the way it’s done today versus the way it was done so many years ago in the infancy of our nation.

Patti: Excellent. You’ve mentioned central banking, that’s going to be the subject of our next podcast. Eric, thank you so much for joining all of us today. You are so eloquent.

You know so much about this stuff. I really appreciate all of the research and everything that you did to boil this down for this podcast for everybody listening.

Eric: You bet. Are we going to wait for the next one and not reveal it till next season so everyone has to wait?

Patti: Exactly. [crosstalk]

Eric: They got to wait six months.

Patti: This is the finale.

Eric: That’s right.

Patti: This is the season finale.

Eric: We’re going to try and stretch it out.

Patti: Exactly.

Eric: The anticipation, central banking, lookout.

Patti: Oh, my goodness.

Eric: People will be hanging on the edge of their chair. [laughs]

Patti: Actually, this is what they refer to as evergreen content. We could launch this now. For those of you who are listening, you could be listening to this now and every once in a while. When you got to want to get a primer on the federal debt, you can always listen again. Grab a glass of wine, having trouble sleeping, we’re there for you no matter what.

Thank you again. Thanks to all of you for joining us. I look forward to the next time we get to meet again. I hope you have a great day. I hope your families are healthy, safe, and staying somewhat sane during a really difficult time in our nation.

Any questions, go to our website, www.keyfinancialinc.com. Give us your feedback. Ask us your questions. We’re here for you. That’s why we do all of this. Thanks again for taking the time today. Take care.

Ep 53: REBROADCAST: Life or Death Emergency Preparedness – What to Grab?

About This Episode

If authorities knocked on your door and gave you only 30 minutes to evacuate – what would you take? Today’s episode is a special rebroadcast of one of our most popular episodes. With wildfires raging on the west coast and a very busy hurricane season already well underway threatening the east coast, our attention once again goes to the horror of these disasters. “Life or Death Emergency Preparedness – What to Grab?” shares valuable lifesaving information that we all should be aware of.

In this wide-ranging discussion, Patti talks with some of her top employees at Key Financial about their plans for handling a Life or Death Situation. Eric Fuhrman, Jenifer Meehan, Michael Brennan, and former Army Ranger, Kristopher Thompson all join Patti and share their insights on the items that they would grab first. They also detail some of the things they would do to survive a crisis that could last for several days or even several weeks. The information contained in this podcast could save your life! Does anyone know what a LifeStraw is? Tune in to find out.

Ep 52: Asset Allocation Strategies That Work!

About This Episode

Today’s episode is the highly anticipated follow-up to THE Biggest Retirement Mistake that people make. Patti continues her conversation with one of Key Financials’ Portfolio Managers, Sam Baez, and they discuss asset allocations that work best for their clients. They break down successful asset allocation strategies and explain why they are successful. Portfolio management during bear markets and bull markets require different approaches to make sure your portfolio can keep up with inflation and be protected for the rest of your life. Listen today to find out what strategies will keep your portfolio performing at its best!


Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is Sam Baez. For those of you who haven’t listened to the prior podcast, boy, you got to tune into that. That was really good. It was a lot of fun. We talked about the most common mistake retirees make.

To add on to that, I’ll get into the weeds a little bit more. Sam and I are going to be talking about what do people do as it relates to their money, whether it be the asset allocation, the portfolio management strategy, etc.

Speaking of which, Sam is a portfolio manager here at Key Financial. As I said before, he is just a unique planner because he really takes a holistic approach to the money management side of things. It’s so important because it’s not just about a portfolio.

We’re talking about real people here, lives. We’re talking about weddings, trips to Italy, and retirement dreams of being able to finally step back into all the things you always wanted to do and never worry about money for the rest of your life.

Sam, thank you so much again for joining us today.

Sam Baez: Absolutely. Thank you, Patti, for having me back. This is great.

Patti: It’s so much fun, isn’t it?

Sam: It is.

Patti: Yeah, oh yeah. I don’t know about you guys. We’re having fun. We’re learning a lot too. Sam, let’s begin where we ended the last podcast and talk about the asset allocation strategies.

When we talk about asset allocation, folks, what we’re talking about is not just diversification. You can be well diversified if you have a mutual fund or an ETF. That’s diversification, but it’s all the same kind of investment. It could be stocks or bonds.

What asset allocation does is take it to another level to have different types of investments doing different things, right?

Sam: Yeah, it’s true.

Patti: I’ve used in the past, in order to create a really effective strategy, it’s like your garden. You want something blooming all the time, so you have something to look at.

Sam: Absolutely, Patti. I wish I would have thought of that when I was landscaping my new home. I became a home owner back in 2015. I live in beautiful Lancaster County. It’s about an hour from here, but I love the commute. I get to see fields, flowers, trees. The scenery is absolutely beautiful.

Patti: Sidebar, guys. That’s what I call dedication. This guy does a commute an hour each way. Truly, if you were to meet Sam, you’re going to see he’s got a Hollywood smile. He has a Hollywood smile when he walks in the door, got the Hollywood smile on the way home, usually seven o’clock at night, sometimes eight. This guy is incredibly dedicated.

I’m sorry, Sam. I interrupted you.

Sam: Oh, no. It’s…

Patti: Tell me more about that ride home.

Sam: I remember the first year that we had our home, we bought it in the fall, and then spring was coming around the corner. I’m seeing flowers start to bloom, and everybody else is landscaping in flowerbeds.

What’s the first thing that blooms in spring? Daffodils. I’m seeing daffodils. I get very excited. Beautiful yellow, some white. I said, “Let me pick up some daffodils so I can have some blooms in my garden.”

I purchased some daffodils, planted them, two to three days later, all the flowers were gone.

In hindsight, if I did a little more research, I would have known that there’s a certain time when certain flowers bloom, but I just kept chasing it.

Next, tulips came up. Bought tulips, two to three days later, gone. I did that for the entire spring and summer season. I would just keep purchasing whatever was there and blooming, because it was exciting, it was beautiful. You want to buy what looks great at the time.

What ended up happening is I never really had flowers for a very long time. What I learned was you know what, I should go back, I should research, find out when these things bloom, and plant them ahead of time. It’s not as exciting because you may not be planting something that’s doing something right now.

But if you plan appropriately, then like you said, you have something blooming all the time. You have your daffodils in the spring, and you’re ready for mums in the fall.

Patti: That is a great metaphor. I love that, Sam. I don’t know about you, but as I’m listening to you, I’m liking the evergreen approach, you know?

It’s consistent, it’s constant, etc. Unfortunately, and if we can take that one step further, maybe evergreens are like your bond portfolio.

Sam: Sure.

Patti: You don’t really have to worry about them that much, although they do get brown, and they do die, and the deer love them, but unfortunately, they don’t flower. They don’t create that beauty that maybe your daffodils and your roses do. You got to need.

Again, when you’re planning this beautiful garden, when you’re planning your portfolio and more importantly, your future, you want something blooming all the time.

Sam: Yeah. Sometimes boring is definitely beneficial. Not to call evergreens or bonds boring, but stability, there’s a lot to be said about stability. You can’t really hang Christmas lights on petunias.

Patti: There you go, absolutely. Love that. Let’s talk about this thing about sequence of returns and taking a look. Again, let’s take that one step further as we talk about how do we plan for retirees, people who are retiring in the next couple of years.

Now that we’re in this 10th year of a bull market, do you take a different approach knowing that we’re in the mature phase than you did, for example, 10 years ago?

Sam: Without a doubt. We’ll never claim to know exactly what’s going to happen in the next 3 months, 12 months, or even three years, but we do know what has happened historically. Just based on the experience that we’ve got, we can have an idea of what it may look like going forward. We want to be sure to plan accordingly.

In the idea of sequence of returns, when we’ve had a long bull market like we’ve just experienced and we’re currently in, we’ve had over a decade of stellar stock performance. That could continue for another year, another two years, another five years. We don’t know, but the bottom line is based on what we’ve experienced in the past, based on what the data suggest, that will at some point turn.

This bull market is getting a little long in the tooth, and we want to prepare for the downside.

Patti: Isn’t it true, Sam, that just because it’s been one of the longest bull markets, it doesn’t mean that it’s going to end?

Sam: Bull markets don’t die of old age.

Patti: They certainly don’t. You got to look at the metrics. You got to look at things like P/E ratios, etc. When I say you’ve got to, not necessarily you listeners have to, but that’s something that we do take into consideration.

The thing about bear markets and the thing about really bad bear markets is it always feels different. The catalyst that created the downfall is something different. It could be China. It could be what’s going on with Britain and Brexit. We don’t know what it is and we’ll never know in advance, but we just look at a common sense for each individual situation.

If you’re 10 years away from retirement and you’re needing to actually pull the money, we would take a different approach with somebody like that, right?

Sam: Sure, sure. Especially going back to the idea that we’ve had a nice, long bull market and it could continue. The bottom line is if we know that there is a short-term cash flow need, we may maybe have a little more…maybe prepare for three to four years’ worth of cash flow rather than one to two.

Typically, we look at the shorter term. We’ll have one or two years earmarked for either big expenses or just ongoing cash flow that you may need.

In this case, we want to take a little extra precaution and create maybe a few additional years of cash flow. In this kind of scenario, the opposite is also true.

Patti: Yeah, Sam. That’s a really good point. Let’s talk about what happened in the fourth quarter of 2018. We’re not talking about market timing. We’re just taking a look at what happened and responding accordingly. We know that these things can happen. What did you do during that period of time?

Sam: Sure. There’s quite a difference between market timing and just realizing opportunities. I think a 20 percent correction in the market is without a doubt an opportunity.

In that regard, where equities are now representing less of your portfolio than we originally targeted for you, why not take this opportunity to get you back in balance, pick up some stock investments at attractive valuations, and over the long term, you’re going to be happy you did?

Patti: OK, Sam. Now, I’m going to be playing devil’s advocate. I’m going to be a client on the phone with you and say, “The market is down. It’s going down. It’s going to keep going down. We should get out of the market and wait until things are better, and then we can get back in. We can buy lower.” What do you say to that?

Sam: We certainly understand that sentiment. It’s never exciting to watch the portfolio values go down on paper, but the bottom line is, to make that decision, it’s not really one decision. Its two. You have to decide when to sell and you also have to decide when to get back in.

Patti: It’s true. You think about how often does the market lose five percent. It typically does that three times a year. A 10 percent correction…By the way, folks, what I’m talking about is it goes down five percent, and then stops going down.

If we sell at five percent, then you’re not going to recover when it recovers. That happens three times on average per year over the last hundred years.

A 10 percent correction on average has happened about once a year. We sell at 10 percent and then it stops going down, because historically, that’s what it’s done. A 20 percent, good, old-fashioned bear market about every three and a half years.

It’s important to recognize that those things are going to happen. We’re not going to react to it and sell. If anything, just as Sam said, we want to be opportunistic about it. We want to rebalance the portfolio so that we can add a little turbocharge to that car we were talking about in the previous episode.

Sam: Absolutely.

Patti: That is an important, important aspect of things. When we think about investors, a lot of times, there is rules of thumb when you’re retiring. You got to have a lot less in stocks, a lot less risk. Why is growth important during retirement?

Sam: That’s a great question. You often say, when you retire, it’s not like you’re falling off a cliff. You’re just shifting into the next journey of your life.

At the end of the day, if you really consider, especially now with longevity, individuals living longer, we have to consider the fact that you could very well be in the distribution phase, the retirement phase where you’re withdrawing from your investments as you were saving for them.

Patti: That’s really important. For those of you who listened to our podcast with the MIT AgeLab, longevity is a big deal, guys. We are living longer and we are going to be living longer than we ever thought possible.

We got to make sure that this money lasts for the rest of your lives. I got really bad news for you on that one. We’re not going to be able to do that if we focus only on a preservation strategy.

I can’t think of a more certain way of someone running out of money than not keeping pace with even inflation, because you’re taking money out. You’re not getting the rate of return that even keeps pace with inflation, and you’re pulling out four percent per year.

If inflation’s three and you’re pulling out five, you’re losing money every single year in that strategy. That’s not going to be sustainable. It’s important to have growth in the retirement planning, in the portfolio.

Sam, here’s a question for you. When we look back at long-term data, and we look at the average annual return for stocks, call it the S&P 500, or the total stock market, we talk about the average rate of return of between 8 and 10 percent, depending on whether it’s big companies, small companies, etc.

When you look back at that data, which I know you have, how many years, if you look at January to December, how many years did the market actually earn that 8 to 10 percent in a given year?

Sam: Sure. We’re looking back from 1926 to the end of 2018, an average rate of return of around 10 percent. The number of times that the market has actually returned 8 to 10 percent has been zero.

Patti: Zero?

Sam: Never.

Patti: Never?

Sam: We’ve been close. In 1993 and, I believe, 1994, we were pretty close, but we have never, ever hit between 8 and 10 percent.

Patti: That is wild.

Sam: We focus on averages so often because an average to us is what we should expect over time.

Patti: Over time. Those two magic words, folks. Over time, not every time. Big difference. Over time, that part of your portfolio will hopefully average that 8 to 10 percent, but it’s not going to do it every year. In fact, it never has.

Sam: Never has. To take that a step further, if you were to consider over that same time period, the number of times that the market has either gone up over 20 percent or down less than 20 percent, 41 times.

Patti: Oh, my goodness. There you have it right there. That is the issue that we have with averages. In terms of managing expectations and helping you to understand how your money will perform, which to be honest with you, I cannot stand that word, because everybody is chasing performance and talking about, “I want to outperform the S&P 500,” while I’m not really sure you really want to do that, guys, that’s a whole another subject.

I think that it’s really important to take that into consideration, the averages. My point here is that, again, getting back to the original mistake, the number one mistake people make in retirement is, they don’t run the numbers. When I talk about running the numbers, that means continuously. It is called planning, not a plan. You are not going to get that six or seven percent average annual return every single year. It’s just not going to happen.

Not to say that you’re going to adjust your life. You’re going to go and live your life, but things, your portfolio…Sam, I know I’m talking for you, we adjust accordingly, OK?

Sam: Absolutely.

Patti: Very important. It’s interesting. We talk about the mistakes, and the things, etc. I often go back, and I’m going to date myself here, I often go back and I…We have an example internally of three different allocations, let’s say.

Let’s say that we’ve got somebody with a nice portfolio, a million dollars, and they’re going to do $40,000 a year, pull that out. Let’s compare three different approaches.

Put 100 percent in the S&P 500, put 100 percent in the bond market, or do a 60/40 – 60 percent in the stock market, 40 percent in the bond market. Let’s take the decade of the ‘90s. If you had your money 100 percent in the S&P 500, that million dollars grew to over four million dollars. If you had 100 percent in the bond market, hey, you ended up with a million five. That 60/40 mix was at about 2.8.

Let’s assume that you’re going to retire at the end of 1999, and you say, “You know, Pattie, I’ve looked at these portfolios, and jeez, over the last 10 years, look at what the stock market has done. If I had done what you and Sam had recommended,” – sorry, Sam. I know this is your baby – “if I had done 60/40, a diversified portfolio, yadda yadda yadda, I’d end up with a million three less in just 10 years. Why in the world would I ever want to do that?”

OK, guys. Fast-forward. Let’s look at the next 10 years. The next 10 years, 100 percent in the S&P 500. Guess what? Ended up with $483,000, while that 60/40 blend, granted, it was worthless, but it ended up with almost $800,000. Keep in mind you’re pulling $40,000 out per year rising with inflation.

It was a terrible decade, one of the worst decades in our economic history. That’s why we don’t chase returns. What has happened historically, and we say it all the time, past history is no guarantee of what you can expect in the future. It’s often a really bad way to invest.

In fact, sometimes, and I’m not going to say you want to do the opposite, you really want to take – how would I say it – a very studied look at not just the short term. There’s a term in our business, and I’m going to use this jargon. It’s called recency bias. Be really careful about being vulnerable to that. That is yet another mistake people often make as it relates to retirement.

Sam: Yeah. If you chase daffodils, you’re going to wish you had tulips.

Patti: Oh, boy, is that the truth. We’re planning this garden and we’re getting lots of different types of investments, lots of different things blooming at different times.

Let’s summarize the asset allocation. I guess there’s two extremes, right, Sam? What would you say would be the two extremes you’ve seen in your experience?

Patti: Sure. I would say that a lot of times, we either see one end of the spectrum or the other end. One end being, they’re retiring, want to preserve their capital, I just want to be uber, uber-conservative, and we understand that.

There’s also the other side where clients may feel like I don’t quite have enough for retirement. I need to really get aggressive. I need to grow this money, so I need to invest in all stocks or I need to invest in the latest fast stock.

Sam: Greatest thing, right?

Patti: Yeah, latest, greatest thing.

Sam: Bitcoin, here we come.

Patti: Absolutely, because I need to make up for lost time. Truly, the answer is somewhere in the middle, but at the same time, also depends on what your needs are.

A lot of times, sometimes it may make sense to be aggressive even if you’re coming closer to retirement, or if there is not a huge need for you to grow your assets, it’s OK to be conservative. We need to run the numbers and make sure that it makes sense for your own situation.

Sam: I guess with the size of the companies in particular?

Patti: I would also say that you got to know thyself, because we often assume that we understand how we’re going to respond to a certain event, whether it be an incredible, great environment.

I saw in the ‘90s, it was a really tough time to be a financial planner, because everybody wanted to have everything in the large growth and nothing anywhere else. Equally so, you don’t want to be overly conservative as it relates to this season of life.

Let’s pull this together, Sam. I think we’ve got three really good takeaways. Number one, I love what you said. Retirement does not represent an end to your investment journey. It simply represents a shift. It’s a shift. That’s all, folks.

Number two, understand what you need to earn. We often refer to your personal. That’s your drop dead rate of return that you need to know you’re going to average over a long period of time. Then you create the model which historically over time has done about that or, frankly, better.

Then number three, please, please, please expect that things are not going to be average, because guess what? You aren’t average.

Sam Baez, thank you so much. This has been terrific, a lot of fun. Thanks to all of you for joining us today for the Patti Brennan podcast. As always, if you have any questions, feel free to call our office. You can get our contact information on the website.

Until next time, I’m Patti Brennan, and thank you again so much for joining us. Have a great day.

Ep:51 The COVID Economy and The COVID Market – Not the Same!

About This Episode

The economic response to the COVID pandemic has not been the same as how the global markets are responding. In today’s episode, Patti dissects the difference between the markets and the economies with her Chief Investment Officer, Brad Everett. How can it be that the S&P is just below an all-time high right now, despite the pandemic? What are the best strategies and moves to make with portfolios right now? It might not be what you think! Patti and Brad discuss the important principles that are protecting portfolios despite the pandemic, as well as identifying the one thing investors should absolutely NOT be doing right now!


Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is our chief investment officer, Brad Everett. Brad and I are going to talk about the markets and a little bit about the economy. I thought it would be a good time to get an update in terms of what’s going on and what we’re thinking about what’s going on.

Brad, welcome to the show.

Brad Everett: Thanks, Patti.

Patti: Alrighty. Let’s talk about COVID. I got an email from a client this morning, and I thought it was a great way to explain the spread of the virus. Basically, it was a visual picture of six people sitting at a table, each one working on their own projects. One of them is using glitter. Of course, by the end of this project, everybody has glitter on their project.

I thought that was an interesting metaphor for how this virus spreads. It’s kind of like glitter, right?

Brad: Sure.

Patti: With that in mind, let’s talk about COVID. Where we are with the vaccine, the market. The market seems to just not really care anymore. What do we think about the decoupling? It certainly seems like we’re still in a recession, right?

Brad: Yeah. It’s almost like the market has completely ignored 2020 altogether. To think that the S&P is, what, six or seven percent below an all‑time high right now despite the news is pretty astounding. I think you have…decoupling is a good word between the prices and fundamentals, where you have this race.

Can fundamentals improve in order to catch up with stocks in a certain speed, or if it takes too long, you’d think stocks would come back down to adjust down toward the fundamentals.

Patti: When we talk about stocks, we’re talking in general, but certainly, not every company is participating in this recovery, in this rally, right?

Brad: Sure. I think this is probably even a longer‑term issue than just now. You could really argue that the vast majority of the gains are concentrated in very few of the smaller stocks. I saw a stat this morning that the average gain on the FANG stocks since the beginning of 2015 has been 35.7 percent a year through the end of May.

We’re a month and a half short. The S&P without those is up 3.4 percent per year, so there’s an incredible gap there between the top 4 or 5 and the 495.

Patti: That is amazing. So let’s just restate this. The FANG stocks are Facebook, Apple, Amazon, Netflix…

Brad: Google.

Patti: …Google, right. So you’ve got those five companies. And what timeframe was that stat?

Brad: I believe January 1st, 2015 they started that calculation.

Patti: So as of January 1st, 2015 to May of this year, the rate of return for those five companies was…

Brad: 35.7% per year.

Patti: …35% per year. If you just take out those five companies, we’re still talking S&P 500, right Brad?

Brad: Yeah, exactly. Basically, the S&P 496 without those 4.

Patti: Crazy. What’s the rate of return?

Brad: 3.48.

Patti: 35% versus 3.48. We see this from time to time, but that is an incredible difference and really speaks to when we talk about the market, what are we really talking about. It’s really NASDAQ. It’s really those major companies.

Brad: I don’t know if there are very many portfolios on Earth that have kept up with the NASDAQ in the past five or six years.

Patti: Amazing. So let’s go back to COVID. The market has recovered, seems to be looking optimistic, as state by state, things begin to open up.

Here we are as we record this, it’s mid‑July. Now, all of a sudden, the number of cases are rising and states are beginning to rethink their policy and beginning to shut back down again.

So given that, we don’t know – we never know – whether or not we’re actually out of a recession. Certainly, the first quarter, second quarter, deep, deep, terrible contraction. Who knows what this quarter is going show, right?

Brad: Sure.

Patti: What do you think about where we are with the economy, and what do you think about a second wave?

Brad: Sure. Yeah, there’s a few things there. I think COVID wise, you almost have to rely on a vaccine at this point. We’re going into an election.

If you just think of the math of herd immunity, if you made the argument that 10 or 15 percent of the country’s been exposed, I think a lot of people would argue and doctors will differ here. But if you think 60 percent of the country have been exposed to it for herd immunity, you’re looking at potentially another 175 million people that would have to get it in order to have this herd immunity.

Even at a very low, think of a one percent mortality rate, I don’t know that any politician can take on that kind of risk. You almost have to keep the economy in some kind of state of not quite open yet. I don’t think that in an election year anybody can explain away those numbers. You just have to wait out the vaccine.

Patti: It is going to be really, really interesting in how the government responds to all of that. Not only from a policy, in terms of shutting down the economy again, but then what do they do to keep the grease on this machine to make sure that we don’t really go into a deep, deep contraction.

This is kind of a sidebar. We’re going to be recording another set of podcasts on the government response as well as the Federal Reserve response, what that really means, why they’re doing it, what that could lead to in terms of our tax rates, inflation, and what it could mean for our children.

Brad: Sure.

Patti: Brad, you’re so good at this in terms of breaking down the really complicated stuff into something that is digestible, and people can grasp. Boy, there’s nothing more complicated than all of that.

Going back to this. Let’s say that we get a second wave, double‑dip recession. What do you think about the probability of that? Even if we’re coming out of it. As we were talking, you marked the recession. Even if you have a little bit of improvement, the recession is theoretically over.

Brad: It’s a funny idea that we could technically be out of the recession already. Nobody’s ever going to announce the end of it.

But if you say that the second quarter was the worst, in terms of GDP, even a very small fractional gain in quarter three, means we’re technically out. Growth off the bottom is usually not that difficult, especially if GDP is down a significant amount, and you just have a 10 percent return to what you were before, then you’re ahead.

A double‑dip recession is certainly not impossible. It’s happened before. I was just a little kid at the time, but I think in the early ‘80s that was probably the last one. Usually, there’s so much pent up demand that it’s really hard to not grow a little bit off the bottom and avoid that double dip. But it’s happened before.

Not to always talk about politics, but it seems to come down to that. You really have to bungle the response if there was a second wave in order to have a re‑complete shutdown of everything and go back to even worse than where we were.

Patti: I think you’re absolutely right. Let’s take personalities out of the picture, forget, just talk about leadership.

Brad: Someone’s going to be president. We don’t know who. That person will be responsible for the second wave if it comes back in the fall.

Patti: Sure. The market’s response to that ‑ if I can make a crystal ball prediction ‑ I have this feeling, I have this belief that even if we get a second wave, and even if states have to shut down, I don’t think the market’s going to freak out like it did in March. This thing of FOMO, fear of missing out, is very real.

Brad: Sure.

Patti: So many people sold stocks in March and never got back in. Nobody expected this kind of recovery this quick…

Brad: Right.

Patti: …when the market was losing 3,000 points, 2,000, 1,000, up 500, but then right back down again. It was a really, really scary period of time. The people who sold never really got back in, because they were expecting that’s the way markets do perform. They go back up, but then they go back down. It’s a head fake, right?

Of course, we had the talking heads that said fundamentals are really bad. There’s no way that the market is going to recover that quickly, because we don’t even know what the earnings are going to be. Those people who sold said, “Gee, I was right. I’m going to wait until after it goes back down.”

Brad: A better entry point.

Patti: Yeah, the old story. It hasn’t. That train left the station.

I believe, can’t guarantee it, don’t know for sure, but knowing human behavior, I think if we do get a second wave, and if the government does have to shut down ‑ I’m not even sure they’re going to do it as drastic as they did before, but they might ‑ the people who would sell again or sell this time, basically saw how the market recovered so quickly and are like, “Well, I don’t want to miss out.”

Brad: Right. There wouldn’t be so much volume going down.

Patti: Exactly. That’s what makes it. It’s a self‑fulfilling prophecy.

Brad: Right.

Patti: While nobody knows, and we do have an election to add and compound the issues, a lot of things are going on, US, international, trade. Isn’t that interesting how all of the sudden, nobody’s talking about China, and that was what everybody talked about a year ago.

Brad: Right, sure.

Patti: These things are always going to happen. There’s always going to be reasons to be worried. There’s always going to be reasons to be toning down the portfolio, etc. I will tell you, as you know, our belief. We believe that you tone down the portfolio as you approach that period of time of needing the money.

Brad: Right, exactly.

Patti: It’s a time thing. That should serve.

Looking at another statistic. One of my favorite podcasts, for anybody listening today, is a podcast called “Animal Spirits.” It’s Ben Carlson and Michael Batnick. What I love about their podcast is they do a lot of this they kind of tease each other and jostle each other.

We do that an awful lot here at Key Financial, but we kind of keep it clean for the podcast. These guys are so smart.

I was just listening to a recent one. They came out with a number that blew me away. To give the proper person credit, it’s Jeff Wininger, who is a real data fiend. He’s really terrific when it comes to calling the data, looking at the opportunities and things of that nature.

The top 100 companies in the US stock market, as measured by size, when you combine those, they are larger than all other public companies in the entire world.

Patti: Isn’t that amazing?

Brad: Yeah, incredible.

Patti: That is amazing to me in terms of market capitalization. The big are really getting bigger. They happen to be located, for the most part, most of them are right here in the United States.

Brad: I’ve actually heard the argument that actually could continue as big data becomes so important. The people that become large then have an advantage of having the data too, and they can become larger and larger.

Patti: Absolutely. Again, it becomes another self‑fulfilling prophecy. We’re not going to make investment decisions based on that information, right?

Brad: I guess with the size of the companies in particular?

Patti: Here’s the thing. I would say that, again, knowing our philosophy, etc. We are certainly going to overweight the United States, and we also overweight large, because we’re looking at market capital, we’re measuring it, and things of that nature.

Brad: Sure.

Patti: Having said that, this is not the time to abandon the other asset classes either, right?

Brad: Right.

Patti: Small companies become mid‑size companies and become large companies. That’s how those companies got there. Some of them did it really quickly, right?

Brad: Sure, absolutely.

Patti: Even though we come out with these stats, we talk about large, it’s not to say, “Hey guys, just get rid of those small company funds that you have. Get rid of the international stuff that you had. By all means, bonds are dead money, so get out of that, too.”

The principles of asset allocation and diversification that have been tested over every economic environment and every situation, they work overtime. They don’t work every time.

Brad: Right.

Patti: But they work overtime. You want that compounding working for you.

Brad: In every time there’s been some example of something that’s been doing really well when everything else hasn’t that convinces you that you should abandon diversification and just go into that thing. But the recent 10 years, the large‑cap growth has really been the thing.

Even value has not done well. Small‑cap stocks have not done as well as large growth. You could really convince yourself that you could make a lot of money for the rest of your life if you only just bought US large‑cap growth.

We have to believe. We don’t know what the reason is, but eventually, that will end and something else will cycle and become a good performer again, too.

Patti: An interesting stat that you actually came up with for the investment committee meeting. Again, a really, really wide dispersion with the Russell 1000 Value, that particular index is down 15 percent. It lags growth by 32 percent.

Brad: That’s just this year.

Patti: That blows me away. That absolutely blows me away. That is really something.

Brad, it’s beginning to feel a lot like the end of the ‘90s, where large‑cap growth, large‑cap growth, you had Greenspan in 1996 talking about irrational exuberance.

Brad: Right.

Patti: It just year, after year, after year, ‘96, ‘97, ‘98, ‘99, and same thing. Here, we preach diversification, etc. Back then, rightfully so, clients were like, “Well, Patti, we don’t understand why you keep trimming off the large growth and buying the stuff that isn’t doing anything.” Like, “Let’s not do that.”

The problem with that is that if you don’t trim from time to time, that overweight, it grows to so much, and then when it crashes, which it did, then you lose so much more money.

Brad: Sure.

Patti: Trying to keep people in 1999 in small‑cap value, it was a Herculean effort, because that just had done nothing. Again, small companies’ value underpriced, yada, yada, yada, whereas growth is going up, 30‑35 percent per year. Then in 2000, don’t you know, what happened to growth? It crashes and small‑cap value is up 23 percent.

Brad: If you don’t trim, too, that position or that asset class becomes a larger and larger percentage of your portfolio. You can almost grow into a risk exposure that you weren’t prepared for or didn’t even understand you had.

Just when the thing is about to crash, you’re at the highest investment percentage you’ve ever had in it.

Patti: Again, use the math and let’s make this real for people. You put $100,000 into something, and it grows year‑after‑year 20, 30 percent, 15 percent, and it’s now worth a million dollars.

Well, if it’s like what happened in the tech bubble ‑ let’s even just say it loses 50 percent, not the 70 percent that many of those companies lost, and many of them went out of business ‑ now, you’ve lost $500,000.

Again, trimming is a good idea. You’re never going to be out of everything or anything. It’s just diversify, asset allocation, those principles. Again, they don’t work every time, they work over time. You want to get that math, that compounding working for you to build true wealth.

Brad: Sure.

Patti: In the meeting that we had, you made a very interesting comment about comparing the earnings yield on the market versus the BAA yield. Can you talk to that a little bit for everybody?

Brad: Yeah. Historically, it’s been a good comparison between bonds and stocks. If you take the P⁄E ratio, let’s say a normal P⁄E ratio is 20. That’s high, but whatever. We’re just making up numbers here. The earnings yield is the inverse of that. Instead of price to earnings, it’s earnings to price. You would have an earnings yield there of five. The inverse of 20⁄1 is 1⁄5, so you’ve got a five percent earnings yield.

Patti: By the way, folks, what you are listening to right now is a person who was a dual major at John Hopkins in applied mathematics and economics. This guy has just got a machine in his head. I couldn’t do that math, but he can. You know what, together, this is what you get. It’s amazing.

Brad: Yeah, just need a pocket calculator and you could figure it.

Patti: You don’t even use a pocket calculator. Don’t even say that, Brad.

Brad: [laughs]

Patti: You just do this stuff in your brain. I need the pocket calculator. But go ahead, I’m sorry. We digress.

Brad: No, that’s fine. That’s a good way to calculate the yield of a stock, which is a weird consideration. Then usually, historically over the past 25 years, the spread between that number and the yield on BAA bonds, an investment grade bond, is actually very, very narrow. It’s always very small. Almost 0.02 percent is the average gap there.

Right now, it’s over one percent, which would suggest that stock prices aren’t necessarily very low, are very high relative to bonds. In order for that number to align itself, either stocks would have to go up in price or bonds would have to go down. It’s interesting.

It’s a foggy number, because it’s based on forward earnings, which is tough to figure out, especially if you don’t even know what businesses are going to be open in three months. It’s an interesting idea there.

Patti: It also speaks to this concept of when interest rates are so low, it’s OK for the P⁄E multiple to be higher. You used the number 20. When you look at long‑term average, the long‑term average is closer to 15, but you hear a lot of people saying because interest rates are so low, then it warrants and it’s OK that the P⁄E is higher. It goes back to that whole concept of TINA, right?

Brad: Yeah. You’d expect stock prices to go up when bonds are really unappealing.

Patti: The fact of the matter is, like I said, TINA. There is no alternative.

Brad: Yeah, you have to pick something.

Patti: You got to pick something if you’re going to invest. You’re going to stick it in the bank, that’s dead money. You’re going to put it in a bond, the Treasury is paying all of 0.7 percent right now, and you’re going to lock it in for 10 years, and by the way, you got to pay taxes on it.

Brad: [laughs] Right.

Patti: Dead money for 10 full years, or you put it into the S&P 500, you get a dividend of maybe two percent. By the way, that’s taxed at a better rate, 15 percent tax instead of ordinary income, and you get paid to wait.

This whole idea of it’s OK with interest rates being so low, the P⁄E multiple is going to float up, may not be representative of literally how expensive stocks really are. Given the behavioral aspect of all of this thing called investing, given the fact that there really isn’t a very good alternative, I’ll just stick it in the S&P 500 and go into a coma.

The coma thing works really well, because 10 years from now, I kind of have to believe, I don’t about you Brad, but I kind of have to believe that when that Treasury bond matures, and you get your principal back, you got all of your 0.7 percent, again taxable at ordinary income, I got to believe that the S&P 500 is going to be worth a little bit more.

Brad: I think that’s a fair bet.

Patti: What do you think? OK.

Brad: I would take that.

Patti: TINA is alive and well.

Brad: Absolutely.

Patti: This is kind of, hmm. I haven’t said this out loud, but I’m going to say it out loud to you, and we’re going to pretend that there aren’t thousands and thousands of people listening to this. I wonder if this isn’t all kind of orchestrated.

I wonder if maybe the government and the Federal Reserve know that that’s going to happen, understand this concept called the wealth effect, which by the way, we see all the time.

The wealth effect, for those of you who are listening that I’m pretending that you’re not listening, the wealth effect works like this. When people get their monthly statements, we, as a billion‑dollar firm, get phone calls.

When those investments, that portfolio is down, they are nervous, and they are like, “We were thinking about doing A, B, and C, buying the car, doing this renovation, etc., and we’re not going to do that, because we don’t think it’s a good time.”

They’re worried. When they get their statement three months later, they’re feeling really happy. They’re feeling warm and fuzzy. This wealth effect is alive and well, and they’re like, “You know that renovation that we wanted to do? We’re going to go ahead and do that now,” and they go and spend that money.

That is a powerful concept. Again, those of you who are listening, we’re going to record the next two podcasts. I hope to take this very complicated subject and explain why spending is so important to keep this economy alive and well. It’s really important. I think that there is so much misinformation out there, and the headlines do not tell the story.

This idea of this wealth effect. The Federal Reserve, they’re smart people. The government, again setting aside personalities, there are some pretty smart people there too. They learn. They learned from the Depression. They learned from Pearl Harbor.

They’ve learned from when Kennedy was shot. They’ve learned from when we went off the gold standard with Bretton Woods. They learn, they learn, they learn.

They learn what works. They learn what was not nearly as effective. They learned what has more of a lag effect. They learned. I believe that they’re getting better at it. I believe that what they’re doing now is the result of all of that learning. It’ll be really interesting to see how this…

I can’t wait for five years from now. I don’t know about you. I just can’t wait to see in hindsight how this thing all worked out. Did what they’ve done and what they might do with the stimulus. Did it work? How quickly? How effective was it?

Then I’d also be interested, again five years from now, when this is a semi‑coma, it’s not the long‑term coma. When I wake up from that one or we all do, what the international markets based on what they did, how did they do compared with the United States.

To pull this together, we’ve been talking about this. We always talk about this as a team, our investment committee. Let’s talk about what we’ve observed and how that has influenced our decisions in terms of what we do for our clients and what we do for their money.

Let’s talk about bonds.

Brad: Yeah.

Patti: Take it away. What are we doing in bond portfolios? What do we think about bonds? Is it something that people should be investing in, given what we just talked about? It’s pretty much dead money. Why bother with bonds in general, and what have we done as it relates to our client portfolios?

Brad: We use bonds for two things. The primary reason is for cash flow. If you have a certain amount of money you need in a year from now, especially at any given time the stock market is volatile. If you need money a year from now, that money should not be in stocks.

Patti: Just to clarify, Brad, when you say for cash flow, you’re not talking about living on the interest on the bonds.

Brad: Correct. You’d have to have a pretty significant portfolio to be able to live on the interest on bonds nowadays. The principal will be far less volatile than holding a position in equities. We have it there as a go‑to place that we trust will be there when we need it, and rate of return is way down the list of things that we care about from a bond.

The other reason is stability. Just for mental health, you want to be able to sleep at night. Not every client can, and they shouldn’t have to, bear the ups and downs of the stock market if they don’t…

We always start with the financial plan first, what kind of rate of return do you really need, and then we back into how much volatility you can bear to accept, and then find some compromise there in terms of how the portfolio should be allocated.

We want you to have enough equities to reach your goals but not stress you out any more than you have to be stressed out.

Patti: It was really interesting. First of all, when you think about where bonds are today, and you think about a 50‑50 portfolio, a 50‑50 portfolio today, if half of it’s in bonds at one percent, you’re going to get a half a percent, right, from that part of the portfolio.

Brad: Right.

Patti: If the other 50 percent is in stocks, let’s pretend that you think that stocks are going to do seven percent. Half of that is three and a half. The total rate of expected return on that portfolio is four percent.

A lot of people may not be OK at a four percent rate of return, right?

Brad: Right.

Patti: It was fascinating. Jeremy Siegel on another interview, he came out, and I thought it was really interesting. He believes that 75‑25 is the new 60‑40. Isn’t that interesting?

Brad: Because bond yields are so low.

Patti: Right, that people are going to be forced to accept more volatility in the equity side of their portfolio to try and give them the opportunity to get a higher rate of return, because if takes 5 or 5.5 percent to achieve your long‑term objectives, you’re going to have to stomach the risk that comes along with that, because we’re not going to get it from that half of the portfolio that’s sitting in bonds.

It’s always comes back to financial planning. Everyone is different. What’s the need? What’s the ability? How are we going to orchestrate this from a cash flow perspective? Again, it’s time.

We do this five‑year cash flow. We know how much money each client is going to need from their portfolio for the next 5 years, for the next 10 years, and for the rest of their life, and we build the portfolio to make sure that there is no risk with that shorter‑term money. That’s our go‑to money.

We may not even use it. If the market’s going nuts, we’ll re‑balance, and that would be a great place, too. Give them their $5,000 a month.

Brad: Keep selling stocks.

Patti: Yeah, because we have to re‑balance anyway, so here you go. You need it anyway, so that we don’t get too out of balance, but in those times, as we had them in March between the tax laws harvesting and the re‑balancing, we lean on that safer money.

Brad: Yeah. The bonds allow you to let the stocks go through their cycle.

Patti: Exactly. With that in mind, we made a change in the fixed‑income side of the portfolio. Why don’t we talk about that?

Brad: Sure. Kind of coinciding with the drop in interest rates over the past several years, most actively managed bond funds ‑‑ and not to a large degree, but you have to find rate of return somewhere ‑‑ so usually the best way to find extra rate of return in bonds is to drop the credit quality, invest in something that is not as high grade.

Maybe you go from government bonds to corporate bonds, or you go from corporate bonds to barely solvent corporate bonds.

What we were finding is that a lot of the bonds that we invested in were steadily degrading in quality. We used to have significant allocations to government bonds in our core offerings. Over time, again, in the chase for yield and rate of return, the credit quality dropped, and the government bonds were taken out of a lot of the core holdings.

We made an allocation change from global bonds, which were also on the edge of being high‑yield debt at this point and sold that. We already have specific allocations to high yield. We want to know that what we allocate the high yield actually is the only risk you have in high yield. We don’t want to put 10 percent in high yield and find out you actually have 20 because some other holding had it, too.

As international bonds started to drift down in quality, we made the decision to move from global bonds in general and move into US government bonds. Lessen this hidden high yield exposure that we had and then kind of return to the government bond positions that we used to have hidden in other positions.

Patti: The rationale behind that also is it’s a different kind of a hedge. Our research has shown that when stocks are freaking out, and going down 30‑40 percent, what does really well? Government bonds. By the way, the longer the maturity, the better it does.

To have that hedge, again, to smooth out that return, it’s a really important aspect of managing a portfolio. When you’re hoping to have that, and it’s not there anymore, you want to make sure that that’s being managed.

The other thing that was important in our research is that as we were going through COVID, you found and I found in all of the research that the stimulus and the government programs ‑ whether it be the central banks or the government programs ‑ what we were doing in terms of all of that, the fire hose approach from both entities, was huge.

To give you an idea, in the United States, those people who are receiving unemployment benefits, two‑thirds of people getting those weekly checks are making more than they were when they were working. That is incredible stimulus. There might be some moral hazard.

Those people are not going to want to go back to work. Why bother? That program’s going to end at the end of July. There probably might be another stimulus program where it gets extended. They’re taking about lowering that extra $600.

That’s what we did. Then we compared it to the central banks of Europe, Japan, etc., as well as what they did while all of this stuff was happening from a government response.

It wasn’t as robust. In France, for example, they did a lot, too. France was the biggest stimulus, if you will, in Europe. They were replacing 80 percent of a person’s income. It wasn’t 110 or 120 percent. That’s OK because that’s their thing. Only time will tell.

What we have learned is that that stimulus, and what the Federal Reserve does is really, really important. I am not sure that the international markets are going to do quite as well as the United States, or at least the economies.

We’re learning, we know, the economy is not the market. They are two completely separate animals even through a lot of people think they work hand‑in‑hand.

Brad: Right.

Patti: They sort of do, but they don’t work hand‑in‑hand. It gave us pause. To brainstorm on that whole thing, we made a significant change in our retirement accounts. Why don’t you talk to that?

Brad: Because of that, I think there’s a tremendous advantage, especially at a time like this. Give or take a few percent, I think the US is 51 or 52 percent of the world’s market caps and stocks. There’s only one or two organizations that are responsible for making all these decisions on stimulus, interest rates, and things like that.

The other 50 percent of market cap is a phenomenal amount of parties involved. The idea that there’s a real cohesive organized effort there to coordinate that, the policy response can’t be as quick and as large as what we can do here.

In longer‑term accounts, when there’s no tax impact, we made the decision to go from strictly international investments, strictly ex‑US investments to a more global approach, where a manager can navigate the policy responses and say these seven countries or areas we really like, these three we don’t. Within that, then say which companies and sectors are going to have a pretty good chance of working their way through this.

Rather than just, say, give them a bigger opportunity set to pick from, and say, rather than expecting you to choose only from international stocks, if there’s a company in the US that you want to invest in, too, let’s do it. There’s opportunities to give them the ability to look across that whole perspective.

Again, back to that market cap stat, we have 50 percent of the market cap, but 75 percent of the best performing companies since 2011 are out of the United States. There are phenomenal opportunities there.

Patti: Let’s go back to that. People need to process that. That’s really important, because when they look at their investment mutual funds, they think when my investment mutual funds haven’t done that great, what’s going on?

Talk a little bit about the currency influence on rates of return.

Brad: This has always been, well, not always, but call it since 2013, has been a very deceptive part of what we think how the world stock markets are performing. International markets have not been that bad. They haven’t been that great to a US‑based investor.

In order to invest in a company overseas, you have to convert their currency back to dollars to sell your investment. You could argue that in a given year, anywhere between four and six percent of an international investment you’ve lost because of the appreciation of the dollar compared to the international currency. That’s been going on for seven or eight years now, and that’s a pretty big effect.

Patti: It sure is. In their own currency, these companies are doing fine and dandy. They’re doing great, right?

Brad: Absolutely, yeah.

Patti: When you look at it that way, then 75 percent of the companies are doing better than the US.

Brad: It works the opposite way. There’s been times that the dollar has significantly depreciated versus other currencies. There would be a significant you call it kind of a tailwind behind international investments.

Not only are you investing in companies overseas that are doing well, you’re also benefitting because you’re invested in their currencies instead of ours, which has depreciated at times. The cycles are not quick. It’s always kind of a 5 to 10‑year range. It happens all the time.

Patti: Just to close this loop, where is the dollar now? Is it up? Is it down? Where are we on that?

Brad: It’s been a very long upward trend, but it seems to have flattened out a little bit. There’s two kind of effects, and they’re working oppositely each other, so the dollar’s really flattened out.

There’s the trade deficit. We buy a lot of other country’s stuff, because theirs is cheap and ours is expensive. They don’t buy ours, because ours is expensive and theirs is cheap. We flood the world with dollars to buy these things, and you would think, theoretically, that should eventually work to devalue the dollar.

The opposite effect is that our interest rates are still higher. For foreign investors to invest in US interest rates, even as low as our government debt is paying, it’s still higher than…

Patti: What they can get.

Brad: …everybody else. That creates the opposite effect of demand for dollar. They’re kind of offsetting each other to a certain degree.

I guess you would think that as interest rates collapse, all toward this very low number, that the effect of causing dollar demand is probably diminishing. Eventually, it has to end, whether it’s this year, or three years from now, or whatever. It can’t go up forever.

Patti: Again, we do not want to abandon international all together.

Brad: Exactly, yeah.

Patti: Boy, that would be the last thing you’d want to do, especially at this point in the cycle. When you look at that, the dollar moving sideways in the global, it makes a lot of sense. Why didn’t we do that in the non‑retirement accounts, Brad?

Brad: The problem is with asset classes don’t move together. You have bonds going up and down that don’t even correlate to each other. Short‑term bonds can go up and down differently than high‑yield bonds.

Let’s think of the extreme case. You buy a balanced index fund, a 60‑40 portfolio, the entire holding can go up even though there’s components of that that have gone down. By segmenting your portfolio more, you can pick and choose which parts, even though your whole portfolio is going up, 40 percent of it may be down, but that gives you a tax loss opportunity.

You can kind of capture that for your taxes, reinvest, keep the allocation the same. But you’ve got these different component parts that you can pull out.

If you need cash, you want to be able to pick where to take it from. Not just have this bundled mutual fund that doesn’t give you the choice of whether to sell stocks, bonds, international, US, whatever. The more we can segment, it gives you more flexibility and option when you need the money.

Patti: Option is the magic word. It goes hand‑in‑hand with optimizing. What we’re trying to do is optimize, not just for rate of return, we’re optimizing for risk. We’re optimizing for time and cash flow. Most importantly, taxes. Taxes, taxes, taxes.

The more that we can save money on taxes for our clients, it doesn’t show up on their quarterly reports, but it can have a material impact over time.

Brad: Sure.

Patti: Brad, thank you so much. This was great. There’s a lot of content here. We could talk all day long. It’s a good summary of where we are, what we think about where we are and what we’re doing about it.

Brad: Thanks, Patti.

Patti: Thank you so much for taking the time to join me and join everybody else, who’s really not listening to this podcast. [laughs] But you’re listening.

Thanks to all of you. Thank you for joining me and joining Brad. Thank you for always tuning in. I can’t get over how many people are listening to these podcasts week after week.

We’re really grateful. We’re so hopeful when we do this that it’s providing some value, taking some really complicated stuff, boiling it down into terms that you can understand, help you to see why we might be making certain decisions. If you have any questions, go to our website.

By the way, that whole concept of the depression, and why I don’t believe that we’re going to go into another depression, in about a week, we’re going to be launching a white paper that will go over the 15 reasons why we don’t think we’re going to go into a depression now or ever.

It’s a paper. It’s educational. We’re going to build on that thought leadership. We’re going to talk about there’s going to be another one that’s going to launch on the government debt and how it’s basically setting records every single day, and what we should think about it. We’re going to talk about the Federal Reserve and have another white paper on that.

We’re trying to add the thought leadership that we kind of have within our four walls. Actually, it’s more walls than that, but between our walls. We talk about this stuff all the time.

I want to share it. I think it’s so important, especially during times like this for all of you to have access to the information and give it to you real. We’re not going to paint this great, rosy picture if it’s not a rosy picture. We’re also not going to say it’s the end of the world if we don’t think it’s the end of the world.

With that, I thank you again. Thanks for joining me. I hope you have a great day. Take care.

Ep:50 THE ONE Strategy to Implement When Young

About This Episode

Most people do not start thinking about retirement until they are in their late 40s or early 50s. That is a costly mistake! In this episode, Patti reveals one simple action done in your 20s that will amass almost $800k by retirement. She strategizes with Maddie McTigue, a Portfolio Manager at Key Financial, about the importance of certain actions done consistently after graduation from college that make all the difference in an investment portfolio by the time one is set to retire. At a time when most millennials are starting new jobs, have student loan debt, and not thinking about a retirement plan at all, Patti offers a winning strategy that is surprisingly simple to implement.


Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.”

For those of you who tuned into our prior two episodes on retirement planning and the mistakes people make, I can’t get over the feedback that we’ve gotten on them. Thank you so much for your ratings and for tuning in, and especially for tuning into this show.

What we’re going to be talking about, the retirement moves to make in your 20s and 30s. Whether you have $20 or 20 million, this show is for everyone who wants to protect, grow, and use your assets to live your very best lives. What we’re going to be talking about today are the moves that our young people can make.

Joining me today is Maddie McTigue. Maddie is a very dear friend of the firm. She’s been working with us for many years now, and I have known Maddie since she was four years old.

What I thought might be interesting for all of you who are listening today is I thought you might be interested in getting the perspective of a millennial, of someone who’s actually right in it. To hear some of the lessons that Maddie has learned since she’s worked here, and some of the things that she’s recognized and learned from people that she’s friends with.

Maddie, thank you so much for joining us today.

Maddie McTigue: Thanks for having me, Patti.

Patti: You graduated, you had great education at Temple, you joined the firm right away, and you and your friends have your first jobs. Is there anything in particular that you’ve noticed that young people tend to make? Now that you’ve been here for many years now, have you noticed anything initially with that first job experience, and then what seems to be happening over time?

Maddie: I think that a lot of people fall victim to the lifestyle inflation of your 20s. You start making money, you start buying things, getting your apartment, going out, and you can forget about how far retirement is away and saving. If you make the right moves now, even if it’s really small, it can have a huge impact on your life later on.

Patti: It’s really a big deal. All of a sudden you guys are in high school, college. You never really made the kind of money that you’re making when you graduate. Even with the first job, you’ve got this $30,000, $40,000, $50,000‑per year job, or maybe even more, and you’ve got this cash flow of thousands of dollars.

You’ve got to make some choices. It might be your first apartment or the car, and even just like you said, lifestyle stuff. Lifestyle can be categorized in terms of your furniture, it could be categorized as running around with your friends and going out.

Now, all of a sudden it’s not just Thirsty Thursdays. It’s Freakout Fridays and Saturate Saturdays, and you’re out there partying and having a blast with all of your friends. It’s easy, and boy, what’s 100 bucks at the bar? 100 bucks at the bar, you do that every weekend, it really adds up, right?

Maddie: Yeah. If you create a way of saving, even if it’s a small amount, then you can do those things and create a way to put the money away, not even think about it. Then, you can actually do those things and not worry about it.

Patti: Maddie McTigue, you have learned very well. What you’re saying here is that automatic savings yank the money out of your account, yank the money out of your paycheck upfront, and then go ahead and do all the things that you want to do. Work with that, so you save first, then spend the rest.

When we think about saving and doing all of that, it’s also important to recognize that things are going to happen. What would you say? Build an emergency fund, right?

Maddie: Yeah. Even out here at Key Financial, even when we’re doing plans, we like to look at cash flows, like a three to six months emergency fund for everyone. Maybe that’s an important thing as a young person to make sure you have that, because if something happens, you don’t want to rack up debt for unplanned expenses.

Patti: That’s a really important point. Folks, listen up. By the way, for those of you who might be parents, feel free to share this episode with your kids, because it’s our kids that we want to help. What an amazing difference we can make for our children and this young generation if they just know a few of these things.

By having that buffer money, it prevents those young people from racking up a lot of credit card debt, because that is a terrible snowball issue that a lot of people in America are faced with. Let’s nip that in the bud by creating a buffer so that they’re not racking up a lot of debt.

Let’s talk about other kinds of debt, like student loan debt. A lot of our young people are graduating with student loan debt. It’s really hard when you graduate and you’ve got this great job, and all of a sudden you’ve got these student loans.

Is there anything in particular that you’ve noticed in terms of yourself, friends, etc., in terms of the student loan debt, and then any advice for everybody listening today?

Maddie: Yeah. The biggest thing for me that I see is that people are extremely uneducated on their own student loan debt. They graduate, and they have all this loan.

Whether it’s just because they’re overwhelmed and they don’t even want to look at it, whatever the reason may be, they’re really uneducated on the term of the loan, the interest rate on the loan, and even what their monthly payment is.

That’s one of the first things that would be important for young people to do, once they get out of college, is to educate themselves on their loans and make sure that they know about all of their loans.

Patti: You told us a story before we started today that was pretty wild. Tell us more about that.

Maddie: I have a friend of mine who graduated, knew about our loans, was paying them. Four months had gone by, and she was pretty on top of her credit score. One day, she saw that it dropped 40 points.

She started to look into it, was like, “I pay everything on time. I have no idea why this happened,” ends up there’s a completely separate loan from college that she didn’t even know about and had not been paying on it for the past four months. Now, she is working her way back getting her credit score back up, but it affected her in seconds.

Patti: It’s taken two years to crawl out, is that right?

Maddie: Yes.

Patti: FICO score, for those of you who are listening, is really important. If you’re going to rent an apartment, or if you are looking for your next job, a lot of times your employer is going to look at your FICO score.

From an employer’s perspective, it gives them an indication of the degree of responsibility that you might have – the fact that you are able to make a commitment and keep that commitment and pay on time.

If the FICO score goes down, they’re thinking, “Gee, what happens if we have deadlines? What happens if we have this or that? I got to be able to count on this person, and if I can’t count on this person to pay their loan every month, I’m not sure I want to hire them.”

Maddie: To add to that, it’s also affected her personal life, because she’s responsible, and she has a car payment, she has rent, things like that, and it’s looked at in a very different light. Her car payment is more expensive now, because of the interest rate she received after this happened. It affects her personal life as well.

Patti: That FICO score’s really important. Again, take‑away with that is understand what student loans you have, make sure you’re aware of everything, and create a strategy to make sure that you’re able to make those payments on time.

To Maddie’s point ‑ which, Maddie, I thought it was excellent ‑ you’ve got to get educated because there are different ways to pay off your student loan debt. If you’re just starting out, you can do an income‑based repayment plan versus just taking that straight 10‑year repayment.

Be kind to yourself, understand what the options are, and whatever you do, make sure you’re making those monthly payments. Let’s talk about more fun things.

We talk about the beginning, you’re in your 20s, you might be single. You’re living life, you got this great job, and we’re talking about retirement here, Maddie. How many of your friends are thinking about retirement?

Maddie: I don’t think many right now.

Patti: It’s interesting. Most young people don’t think about themselves in their 60s and 70s and 80s. They’re just thinking about Thirsty Thursdays, Freaky Fridays, and Saturated Saturdays. Yet, the impact of thinking about that, and really getting involved in whether it be 401(k)s or IRAs, it’s pretty dramatic, isn’t it?

Maddie: Yeah, definitely.

Patti: Let’s talk about the example that we talked about with saving, beginning to save at age 22. Let’s build the story. You graduate from college, you’re 22 years old, you got your first job, you’re single, you’re living your life, and you have this wonderful opportunity of putting money into a 401(k) or an IRA. Maddie McTigue starts right away, which you did, because I know that you did.

Maddie: You started saving, and let’s assume it’s $300 a month. You do that religiously every month until you’re age 62. How much money at seven percent rate of return do you have by the time you’re 62 years old?

Patti: $787,000.

Maddie: It very seldom does, and I think planning ahead will help. Even if things do run smoothly for the duration of your retirement, knowing that you have a plan for when things don’t will bring a level of comfort that’ll help you actually enjoy your retirement rather than worrying about it.

Patti: You have $787,000. Folks, for those of you who are listening, the total amount invested was $140,000. That’s the amount invested, and it’s almost 800 grand.

Now, let’s pretend that we have another friend, and they say, “You know what? I don’t want to be saving. I don’t need to worry about retirement. For crying out loud, it’s 40 years from now, I’m not thinking about that,” and they choose not to save.

Sure enough, they turned 32 years old, and they wake up one day and they say, “OK, I guess I’d better start.” They begin to start thinking of the future, etc. The same $300, folks, we are not increasing the 300. It’s a flat 300, seven percent rate of return. How much does that person have?

Maddie: $366,000.

Patti: Same monthly investment, same rate of return, just started 10 years early. The cost between the two is $421,000. In other words, that’s the cost of waiting and not saving in that first decade of your working years. It’s a big deal.

Maddie: Yeah.

Patti: We talk about opportunity cost, we’re not talking about what to do with the money. We’re just talking about take advantage before you get married, before you have children, before you have the mortgage, before you have all of those responsibilities. Get started right away, it is a very big deal. Use compound interest to work for you, not against you.

Maddie: $300 a month can seem like a lot at 22, but once you do it, it’s like ripping a Band‑Aid off. You don’t even think about it ever again, and you keep going and you keep doing it for however many years it is, and it turns out to be a big deal.

Patti: Yeah, automate it. Automate everything and just spend the rest. The other thing, if we can go back and circle back on the student loans, it’s also important to understand the interest rates that you’re paying on student loans and the credits cards, etc. We want to balance all of that.

Just keep in mind that if you’re going to be doing the 401(k), you might have a pretax option, meaning whatever you’re investing, it comes off of your taxable income, or you can do a Roth. I’m going to give you the advice that I gave to Maddie and my own children, and that is while you’re young, and your tax bracket is relatively low, at least look at the Roth option.

That money grows tax free. Everybody listening, all of you are in your unique situations, everybody’s different. Some of you might have student loan debts, some of you may not. Some of you might have credit card balances, some of you may not.

Here’s the bottom line. Take what we’re talking about today, think it through, and begin to apply the principles that we’re talking about. The three takeaways that we have for all of you today.

Number one, watch lifestyle inflation. Be really careful. Don’t let that sink in, this keeping up with the Joneses or your friends and that kind of stuff. That can really sabotage your future.

We’re not just talking about your retirement. It could sabotage, in general, everything, because it can lead to credit card debt, a fall in your FICO score, and your ability to get that next great job that would pay you a lot more income. Be careful about how you’re spending your money.

Number two. It’s really important to get yourself a buffer, get an emergency reserve. That will also be a great way of preventing that credit card situation because you don’t have the money and you’ve got to pay for something.

Last but not least, please, please, please, start saving early. I like to tell young people at least 10 percent of your income should be going into some form of savings. At the minimum, for those of you listening who might have credit card debt and student loan debt, at the very least, you’ve got to put whatever the matching contribution is that might be from your employer.

That’s a drop‑dead mandatory got to do it. For those of you who don’t have that kind of debt, I’m going to say to all of you it’s a mandatory at least 10 percent. Believe me, when you’re 50 years old, you’re going to look back and thank…I’m probably not going to be here, but you might thank somebody that you listened to this podcast and you did exactly that.

Maddie McTigue, thank you so much for joining me today. Thank you so much for giving us your perspective, because you’re living it. You’re seeing what’s happening, and you’re applying the principles that you’ve learned here, and helping so many people in your generation. It’s a big deal. It’s really important.

Thanks so much to all of you for listening in today. This podcast is for you. It doesn’t happen without your input and your feedback, and I’m just so grateful to all of you for giving us the kind of feedback, the great feedback that you’ve been giving us.

It gives us the energy to continue doing them because we do it so that we can make a difference for all of you. Until next time, I’m Patti Brennan, and I hope you have a great week.

Ep:49 The Most Common Retirement Mistake

About This Episode

Although there are many mistakes made during retirement that are sure to derail your financial plan and the growth of your portfolio – there is ONE mistake that people continuously make as they are looking at their retirement horizon. In today’s episode, Patti sits down with Sam Baez, a portfolio manager at Key Financial and they reveal what that mistake is and the strategies that top advisors are doing on behalf of their clients, so this doesn’t happen to them.


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you want to protect, grow, and use your assets to live your very best lives.

Today I have Sam Baez with us. Sam is a portfolio manager here at Key Financial, and what I think you’re going to find, and what I love about Sam is he really takes a holistic approach to managing money.

It’s not just about the pie chart for Sam. He really looks at every individual client’s situation to determine the best strategy based on what might be happening today, tomorrow, and for the rest of that person’s life.

Sam, welcome to the show.

Sam Baez: Thank you, Patti. Thank you for having me.

Patti: Here we are. We’re talking about the most common retirement mistakes, and boy, have we seen them, haven’t we?

Sam: Sure have, yeah.

Patti: To me, it’s such a privilege to be able to walk people through different strategies and really take the steps necessary to prevent our clients from making the mistakes that people make over and over again, not because they want to, but because they just don’t even realize what those mistakes are.

Sam: Sure.

Patti: Today you and I, Sam, are going to solve that problem. How about it?

Sam: All right, let’s do it.

Patti: I’m going to ask you these questions based on your experience, and I’ll chime in based on what we’ve discovered together.

If you were to pinpoint one mistake, Sam – just one mistake – what do you think is the most common mistake people make as they’re looking at this retirement horizon?

Sam: That’s a great question, Patti. Obviously there are a number of things to consider when planning for retirement, but I think the most important thing is you have to run the numbers. You have to know where your income is going to come from, and you have to know how you develop a strategy to support that.

Patti: It’s really interesting. When we say “run the numbers,” we are literally running cash flow statements for every year for the rest of that person’s life. We’re integrating the tax planning, so we’re running the tax calculations and considering that as part of the cash flow needs.

Is it fair to say that oftentimes people are surprised when you actually run the numbers? I don’t know about you. Some people come in, and they think, “Oh, Sam, I’m never going to be able to retire.”

Sam: Running the numbers is extremely important when looking at and then developing a plan for a client. It’s a lot like taking care of your car. You have to look under the hood – look at the engine, check the oil, look at the air filters – all these different moving parts for a car, where on a daily basis, when you put gas in a car, we’re ready to go.

If we’re planning for the longevity of a car, we really want to dig deeper and look at all the moving parts to make sure that we’re not going to get blindsided by something that we may have taken for granted or not planned for.

Patti: I love that analogy, Sam. I’ve never used that, and it’s a great one, because that’s exactly how many of us drive every day.

We just throw the gas in the car and go. In reality, we do have to take it in from time to time and get our inspections, make sure the brakes are working, make sure that the engine’s running, that the oil hasn’t turned black on us – although I think oil is black anyway.

But you know what I mean.

Sam: Yeah.

Patti: It’s a really good point, because if one part of this car isn’t working, it is not going to go. Or, it’ll go, but it won’t be efficient. Frankly, it won’t last for the 10 years that most of us want to keep our cars. That is not the way you want to go into a retirement, that’s for sure.

Sam: Exactly. Piggybacking on the same analogy, a lot of times even when something’s wrong, a car will continue to run. You won’t even know anything is wrong. A lot of that can happen with retirement, but the last thing you want to do is figure that out 10 years in.

Patti: Boy, you are not kidding, because then it really is too late, so why not just run the numbers? I think, to take it one step further, isn’t it true that when you run the numbers, you’re not just running a baseline based on what we think is going to happen? We’re going to stress-test it, right?

Sam: Absolutely.

Patti: Tell me more about that.

Sam: That’s actually one of my favorite things that we do, because – I don’t want to say it’s easy to paint a rosy picture, but we can certainly make certain numbers work, in a sense, as long as everything just runs smoothly.

Patti: Right. How often does life run smoothly?

Sam: I’ll let you answer that question.

Patti: Yeah.

Sam: It very seldom does, and I think planning ahead will help. Even if things do run smoothly for the duration of your retirement, knowing that you have a plan for when things don’t will bring a level of comfort that’ll help you actually enjoy your retirement rather than worrying about it.

Patti: It’s a really good idea. Isn’t it true that anxiety is fear of the unknown? If we go into this understanding the impact of a bear market right at retirement, or higher tax rates, or higher inflation, or a wedding, the cars, those things are going to…

You know when people are retired, also, Sam, guess what? People have extra time on their hands.

Sam: They sure do.

Patti: All of a sudden, all of the things that they didn’t have time to do like the home improvements and fixing this and fixing that, that really adds up. All of a sudden, people start to do those things.

If we don’t include that in the scenarios, then we’re going to be using capital that we were planning on for year 10 that’s actually being eaten up in year 2. That is often a prescription for an early demise of a person’s working capital.

Sam: Absolutely

Patti: Now that we’ve identified that running the numbers is really important, what would be the next thing that you find, Sam, is often overlooked by retirees?

Sam: Once we’ve run the numbers, we kind of have an idea for what the short-term cash flow need is. Now at that point, you have to develop a strategy for providing that income.

It seems easier than it may actually be as far as from an efficiency standpoint, so we want to make sure that, for example, we’re being tax-efficient when developing your cash flow strategy. Sometimes it makes more sense to take out of an after-tax account rather than a retirement account.

Until we run the numbers to see what your tax situation’s going to be in retirement, or even a couple of years before retirement, we don’t know what the most efficient strategy is for cash flow.

At the end of the day, taxes are just money paid to the IRS, so the less that we can pay, the more money you get to keep in your pocket, the more money for vacations, cars, weddings, and whatever that is.

Patti: To be clear about this, eventually the IRS is going to get the money, right?

Sam: Sure.

Patti: It’s just a matter of deferring it to a later time. Let’s say that you’re in a 30 percent tax bracket. To the extent that we can defer the tax payment on $10,000, for example, by not taking it as income, taking it out of the IRA, that means that you’ve got that extra $3,000 left in the account to earn the rate of return.

It sounds like a little thing. Guys, it’s a big deal. You do that year after year over time, the compounding aspect of this is huge. That’s what we’re talking about in terms of efficiency.

How about, does it always make sense to defer, Sam? What about those people who might be retiring a little bit earlier? They’re 62 years old. Let’s say they’ve got a nice big 401(k), and they’ve got some after-tax money. Does it always make sense to go to the after-tax money in that situation?

Let’s say they’re going to defer on the Social Security, too, so the only source of cash flow is going to be the after-tax accounts.

Sam: Assuming that they are before retirement age, I would say it makes sense to go to the account that’s going to not have as high of a tax bill, an after-tax brokerage account.

You could take advantage of long-term capital gains rates, which back to your example, if you’re in the 30 percent tax bracket, you can pay 15 percent for long-term capital gains. You’re saving half the tax just right there. Again, it’s sometimes tough to see that until we actually run the numbers

Patti: It’s a really interesting thing. The tax laws are the same for everyone, but everyone’s situation is different.

Sam: That’s correct.

Patti: In other words, everyone is impacted differently by the exact same law. For client A, for person A, what you’re referring to might be exactly the strategy that’s right for them.

Client B, though, let’s say that they’re only going to use the after-tax money. They’re getting capital gains rates, and their ordinary income rate is very low. All of the sudden, that presents some kind of interesting opportunities, doesn’t it?

Sam: Sure.

Patti: We’ve talked about this before in prior podcasts. For example, if a client’s in a 12 percent tax bracket, guess what? Capital gains are not at 15 percent. That’s a big fat zero percent.

Sam: That’s right.

Patti: That’s pretty cool. If somebody’s got investments or stocks that they’ve held for a long time, but there’s a big gain, those are the years where you want to maybe take those gains, because guess what? You don’t have to pay taxes on it. Or those might be the years where we do Roth conversions.

Not the whole 401(k), but let’s take out a little bit each year and convert that from a pre-tax that you’re going to have to pay that 30 percent, in this example, to a Roth where the money grows tax free. Is that the coolest thing in the world? I like tax-free. How about you guys?

Sam: Yeah, we love tax-free.

Patti: Absolutely, so tax-free is the way to go.

Let’s talk a little bit more in terms of other things that people ask. Let me play devil’s advocate.

Somebody comes in to you and asks the question, “Hey, Sam, I’m about to retire. Do I have to adjust my standard of living? Do I need to stop spending money?”

I don’t know how often people come in and say, “I’ll just cut back. I really don’t want to work anymore. It’s killing me. I won’t do the things that I want to do. I’ll just cut back.” What do you think about that?

Sam: I think, not to sound like a broken record here, but until we run the numbers, there’s just no way of knowing. It’s important for us to have all the information to build the plan so that we can let you know.

One thing I love about you, Patti, and the way that you take care of your clients is you’re a straight shooter. You’ll take care of everybody, but you’re also telling the truth, and that, in my opinion, is taking care of your clients.

It’s a matter of, “Do you need to adjust your standard of living?” You may, depending on what the numbers look like. You may be able to live even better than you anticipated.

Patti: It’s a really good point, and I think it’s so important. We’ve got to give it to you real, because that’s when the real trust, that’s when all of that gets developed.

I think that if we’re just winging it and say, “Oh, you can retire. You’ll be fine,” yada yada yada, and we’re not backing it up with lots of scenarios and numbers, and, “What if this happened?” and, “What if that happened? What if the kids get married and then divorced and they move back to the house?” or, “What if we need to go to a continuing care community?”

This is life. This is life, guys. Life is kind of interesting. It just has a way of throwing those curve balls, and when the curve balls get thrown at us, it’s so much easier to handle it when we understand the impact before it happens, when we recognize that these things can happen, and we can respond accordingly.

We’re not going to react. We’re not going to panic. We’re just going to go from plan A to plan B, because before you retired, we kind of knew that that is a possibility, because it all is.

Sam: Sure, and better to see it on paper than to experience it or live through it.

Patti: Exactly. I will tell you that I don’t want to be a Debbie Downer, like I’m not Debbie Downer here. I want to be optimistic. I want to believe that everybody’s going to be financially secure for the rest of their lives. As long as we’re monitoring things and continuing to update the numbers…

We’re not going to do this once. You don’t go to the doctor when you’re 50 years old and assume that you’re going to be healthy for the rest of your life. No, you go in for checkups. That’s basically what we do. It’s all part of the planning process. Like I said before, it’s a verb. It’s not a noun. It’s an ongoing process.

We’ve talked about the standard of living in retirement, and I think that, again, to kind of summarize that – important – run the numbers and include those unusual expenses like cars, weddings, home maintenance, etc., and then the stress test, those numbers too. I think that when we talk about retirees’ main concerns, it really is about, do the numbers work, right?

Sam: Sure, sure, and just kind of making sure that we’re being open and realistic with what we’re expecting in the short term and long term.

Patti: It’s interesting, and one thing that I find often comes up – and you probably do as well – is that the one area that people don’t forget about is health care. I am surprised in a way that the number one concern for soon-to-be retirees is the cost of health care.

People are cognizant of it. They recognize it, and it is an important thing. We can plan for all the greatest things in the world. We can plug in those vacations. We can plug in those weddings and the renovation, but we don’t know what a person’s health is going to be like.

Sam: Absolutely, and that can often be one of the most expensive variables to deal with in retirement. I do appreciate how many scenarios we run in the plan, because certain different rates of return, different jobs can kind of change the trajectory of a plan but maybe still work out. Whereas a big health event can sink a long-term plan.

Patti: I don’t know about you, Sam, but I find a lot of times when we have that conversation, especially if it’s husband and wife, that the wife will say, “Well, gee, I will take care of Jon if something happens to him.” Then when the event does occur, Susan realizes just how difficult it is to take care of another human being.

They do need to bring in help, so why don’t we just run that and see what that looks like? We’re not going to change the plans. We’re not going to say you have to keep on working because we have to be careful if Jon needs care and you’re going to need to hire somebody, but we do want to be aware that that is something that we have to be cognizant of.

Sam: Absolutely.

Patti: Here is the big, big question mark. It is the market, right? The question is how much of your client’s portfolio should be allocated to bonds and stocks? How do you choose the proper asset allocation for a soon-to-be retiree?

Sam: That’s a great question. A lot of conventional wisdom would tell you that it depends on your age. At 65, maybe you have as much in bonds as whatever your age is, but it comes down to running the numbers and knowing what the cash flow need is.

Obviously, you have to be comfortable with the strategy yourself, so considering what your shorter-term objectives are – two to three years – that gives us a ball park for how much should be in less risky, more stable investments that we can turn to if the market were to go south on us.

We are expecting that. We never know when it’s going to happen. We never know how bad it’s going to be, but being prepared for it, that’s how you win the game. You have to be prepared for these downturns by preparing for it for the short term. We’re in this for the long term, so we want to make sure to work on both ends of the spectrum.

Patti: OK, folks, for everybody who is listening, in the next podcast, Sam and I are going to be coming back, and we’re going to get really in the weeds as it relates to how to develop a portfolio that ideally is sustainable through lots of different economic environments during retirement.

I think that this is really important, because that’s the worry that a lot of people have. “How am I going to make this money last? How am I going to live off of the fruit of this tree?”

Sam Baez, thank you so much for joining us today. You’ve been terrific. I look forward to talking with you again as we get into the weeds about portfolio management strategies for retirement.

Thanks to all of you for listening. We, again, have been getting great feedback on these podcasts. I just looked at something, and we’ve gotten only five stars, so thanks to all of you who have given us those incredible ratings.

If you have any questions or want to hear about a particular subject, please come to the website at keyfinancialinc.com. Let us know what you want to hear about.

Until next time, I’m Patti Brennan. Thank you so much for joining us today.

Ep48: Barron’s Australia Summit Recap – Top Tips for Success

About This Episode

Earlier this year, Patti was asked by Barron’s to present to top industry professionals from around the world at the Barron’s Australian Summit. Although this episode was recorded just before COVID – 19 shut down America and the world, the message is still relevant. In a discussion with her Chief Operating Officer, Vince Kailis, Patti is asked to reveal her key takeaways from some of the brightest minds in science and technology today. They brainstorm how these innovations can be applied to increase the financial advisory client experience today, as well as how these revolutionary ideas can change the look of retirement forever.


Patti Brennan: Hi everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Folks, what we’re going to do today is a little different than what we normally do.

I just came back from a trip in Australia, New Zealand. When I go to these conferences, whether they be in the US or on a worldwide basis, I always take lots of notes and I come back and meet with my team. As I was coming back, I thought, if this is good enough information to share with my team, I’d like to share it with you as well.

You’ve chosen to listen to these podcasts, you have subscribed, you’ve shared them with other people. Because of all that, I thought, “You know what? I’m just going to take an unvarnished approach to this podcast today. What you see is what you get.” It’s always been that way with me. I just find that that’s so important.

I’ve asked Vince Kailis, our Chief Operating Officer here at Key Financial. We’re going to have the typical conversation we always have when I come back from these conferences. You’re going to see, if you’re watching this on video, I’ve got tons of notes. I’m going to be reading my notes.

I’m going to be brainstorming with Vince in terms of, “OK, this is what I heard. This is what I think about what I heard, Vince. What do you think we should do about it, and how do we apply this information if we apply it at all?” Vince, thank you so much for joining me today.

Vince Kailis: Thanks for having me.

Patti: We’re killing two birds with one stone because we were already going to do this.

Vince: We absolutely do these meetings every time you come back, and you do them with everybody on the teams. We do them as a group in our leadership meetings. They are the most fun because we get to really imagine where we’re going to be as a company with the ideas you come back with.

Patti: Right. It is so important because, ultimately, the focus is always how do we create the client experience that nobody else is creating. We get so many great ideas. We don’t and can’t implement all of them, but the ones that we’ve been able to have made a material difference in our clients’ lives.

Vince: Absolutely.

Patti: I got to tell you about this guy Kevin Gaskell. Vince, he was unbelievable. This guy has written a book. It’s called “Inspired Leadership.” I haven’t gotten it yet. I can’t wait to get it.

He was just very low key, but the passion just came through the way he approaches any business that he goes into. He was with BMW. He was the CEO of Porsche. In fact, Vince, he became the CEO of Porsche when on a customer satisfaction, I guess there’s 32 companies, they were rated number 32 out of 32 for customer satisfaction. They were losing 20 percent per year.

When he came in, they were a mess, and you know. You’re a car guy. Porsche was really circling the drain.

Vince: Oh yeah.

Patti: What he did was he went in and he pulled his team together. He said, “Kevin’s big thing is, as was Stephen Covey’s, start with the end in mind. What do we want to be a thousand days from now?”

Vince, it was so cool because he said, “It’s not three years. It’s not five years. A thousand days from now, what does this business look like?” But more importantly, what does the customer experience look like? Literally within 18 months, they went from number 32 to number 1 in customer experience. They went from losing 20 percent per year to earning 20 percent per year.

The way he did it was so cool because it’s what you and I have been doing over the last three years also. That is they pulled the team together and they talked about it. He called it war games. War games are putting these pieces of paper up on a wall. You do this all the time.

It’s the humongous post‑it notes with a black sharpie. Everybody comes together and they say, “OK, let’s do some brainstorming. What are we doing now that’s working? What are we doing that isn’t working?”

There are things in the past that we were doing that weren’t working. One of the challenges that we’ve had as we’ve had wonderful growth is how do we make sure that I don’t get spread too thin, while at the same time giving clients that same warm and fuzzy feeling of knowing that I’ve got their back?

Vince: I remember that vividly. We went to a hotel offsite. We had rented a giant room. We had packs and packs of post‑its, sharpies. We hung them up on the wall. We broke into tables and we had these little tabletop exercises.

You said, “If you could imagine this business better, and you could imagine yourself giving everything you can to make the perfect client experience, what would it be?” The model we have now is just what the employees told us, which is what they heard from clients.

Patti: It’s so interesting because Kevin said, “If you want your employees to do a good job, give them a good job to do.” What I heard that day and what you heard that day is people who are in client services, they do the administrative stuff, the paperwork, etc., they wanted to have a deeper, richer relationship with our clients.

Each one of them have a hundred clients. They are responsible for 100 percent of anything that that client might want or need. They go out to their clients’ homes when they’re unable to get into the office. We help them with their computers. We help them with that stuff. That all came out of that meeting.

What’s cool about it is, talk about a morale‑builder. They have deep and rich relationships with these people. It’s unbelievable.

The thing that gives me more joy than anything, Vince, is when Mrs. Jones comes in with brownies for Meg, and they come in with flowers for Stacy because Stacy did something above and beyond. That is just the most wonderful thing that everybody gets to experience what I’ve always got to experience.

Vince: You let them experience something that most CEOs get to experience, which is they got to design their own job.

Patti: That’s exactly right, and you know what? They do it much better than I did. Much, much better. It’s the thing. It’s figuring out what each person’s gift is. The thing that he brought up is the statistics that each one of us is five percent genius. I said this in a previous podcast because I thought it was fascinating because it’s exactly what happens. Each one of us is five percent genius.

If we get 20 of us in a room, you’re going to 100 percent, and that the things that could come out of it, we’re going to throw a lot of ideas up on the wall. We’re not going to be able to execute. The most important thing, Vince, is as we think about this business a thousand days from now, that’s where you come into play is that execution piece.

Folks, I don’t know if you know this, but in our industry where you’ve got a registered investment adviser, you’ve got an independent firm, it is very unusual for a firm to have a Chief Operating Officer. Vince comes from a large corporation. He was number 50‑54 in terms of employees. That company is now 700 employees. I stole him.

Vince: I want to switch gears here a little bit, Patti. I want to talk about some nuts and bolts financial advice. Again, I want to focus more on the parents than for adult‑age kids, or even high school or college‑age kids. What should parents be thinking about things like, for instance, their kid’s out‑of‑state tuition and 529 plans?

Patti: I stole him from that company because I saw his brilliance. We laugh from time to time. Vince, you know this already. He geeks out on us from time to time when we get involved in the computers, etc., but the processes and the workflows.

One of the things that we have to talk about, Vince, when we get together is one of the processes that we are doing now that we shouldn’t be doing. To me, a process is only there to serve our clients. Let’s talk about what our processes are, what the workflows are, what is serving our clients and what isn’t. How can we simplify things?

Vince, if we can simplify things that frees us up and frees our energy, our time, even our resources to go into other areas that would add that kind of value.

God, what we’re doing now with long‑term care communities and researching them and putting together this wonderful kind of template of, “Here are the different communities in the area. Here’s what works here. Here’s how they work. Here’s the cost,” and saving our clients a lot of time and energy or more importantly, their families.

Vince: Absolutely. When we look at how we were talking four years ago, putting papers up on a wall and designing that path, “How are we going to get there?” We made sure that probably the most important piece was that the culture didn’t go away and holding the culture that tight, that clients come first. Period. End of story.

We get that this might seem like it’s an extra step or this, but that’s what makes it for the client. But again, you have to revisit, as you said, tear it down to the walls and say, “OK, what’s working and what’s not?”

Patti: Yeah, because you know what? Guess what, we can’t get complacent. Yes, we’ve done very well. Yes, it’s wonderful. We’ve had wonderful growth. Who gives a damn? I don’t care. The most important thing is I want to fix the roof before it rains.

I want to fix this and I want to go and become that person, and I mean that. We are people serving people. Let’s be the people that our clients want and need in their lives to give them not just financial security. There are a lot of people who are financially secure. That’s not enough.

We want them to have peace of mind for themselves and their families and the things that they care about most.

Vince: What you just said there is exactly it. That’s our culture. That’s who we are as a company. Everything is the client. It’s what they want, what they’re looking for that we’re trying to build. There’s a great long‑term care facility down the street.

We already know many people have gone there and what the prices are and what the buy‑in is and whether or not they can have a table, they can bring in wheelchairs into the dining room. Every little detail we know about those companies and we can help them with that advice of “This won’t work for you because we know how you like this. You like X, you like Y. They don’t have X and Y. They have Z.”

Patti: It’s interesting because when I took on the title of CEO, that whole idea of everyone is five percent genius, my role is really to be a genius generator. Is to really pull that out of each one of you and to really learn how we can together create something for our clients that doesn’t really exist.

Right now, off the top of my head, Vince, I don’t even know what that looks like. We got to really get everybody together and figure out what we do already is far more than what other people do but that’s not enough in my mind. It’s just not enough. I want to get to the next level.

Vince: Things we do that clients don’t know that we do for them.

Patti: That’s another good point. I don’t know. We’ll have to talk to Bernadette about this. I don’t want to brag. We got to do it in a really however way, but the awareness is important.

I’ll never forget, I’ll never ever forget the phone call I got from one of our client’s daughters. I was at a convention at one of these big meetings and my cell phone rang. I picked up the phone and it was…call her Susan. Susan was on the phone and it was late. It was probably 7:00, 7:30. She said, ‘’Patti, I’m calling because I just want you to know that my dad died a few hours ago.”

I went…like it was really sudden, out of the blue. I had seen him a couple of months before and I was devastated at the loss. She was devastated at the loss. We cried together. I basically said, “OK, here are the next steps. There’s nothing that has to be done right away. Let’s go through the next couple of weeks.”

My team will already begin that process of figuring out date of death values and all the things that your mom is going to need to settle the estate. I don’t want you guys thinking about that at all. We finished the conversation and before we were about to hang up, she said, “You know, Patti, there’s something that I think you need to know.”

I was like, “Wow, what could that be?” She said, “I want you to know that when my mom called me to tell me that my dad just died, she said ‘Please, you got to make sure that you call Patti Brennan. You really have to call Patti right away. Then, by the way, call your sister.’”

Vince: [laughs]

Patti: Is that unbelievable? It was incredible. That to me said it all. I almost want to cry to remember that experience. When people get sick, they get a diagnosis. Somebody’s got…they’ve have been diagnosed with dementia, we know exactly what to do, how to position things, etc.

Getting back to Bernadette and this kind of thing, I don’t want to be tacky about it in terms of “We do this, we do that, we do that.” There is a better way to communicate some of the things that we do. We’ll have to put that on the agenda.

Vince: I wouldn’t say that we’re looking at something that’s tacky or not tacky. It’s just making people aware. That story alone, somebody else has had somebody that’s passed that maybe didn’t think to call us first.

Patti: Yeah.

Vince: Or in the first hundred people even.

Patti: I’m not proud to say it but I’m not also ashamed, addictions run in my family. I know what to do. We have resources. We know where to go, what all is involved. It’s not necessarily what a financial adviser does, but it is what we do.

I have people call me for elevators to be installed, I mean everything. I’m not saying that we have all of the answers but a lot of times we know who does. We need to put that on the agenda.

Vince: When I walk around and I’m talking to people during the day and checking up on things, I can’t tell you how many of those stories I’ve heard. “I’m having a septic system replaced.” “I’m having this done to my house.” “I need an elevator replaced.”

There are things that go on here, everyday conversations, somebody on the planning team is analyzing it, evaluating what the best way to do it for them is potentially. Then somebody is there counseling them and emotionally consoling them on that piece of the equation. It’s not just the numbers.

Patti: Absolutely. The real question that we’re going to ask in the retreat is “What is an unmet need for our clients?” Let’s just focus on that and then we’ll see what comes out. OK?

Vince: Yeah, perfect.

Patti: I got to tell you, there were two real standouts. Kevin Gaskell, former CEO of Porsche, wrote the book, got to get the book. Phenomenal, phenomenal, phenomenal speaker. The other speaker was Ric Edelman. Ric Edelman is also a CFP. He’s built this incredibly successful business.

What I love about Ric is his ability to communicate complex ideas and he really makes it interesting. He’s getting very much involved with this whole longevity economy. He’s working with Stanford. As many of you know, I’m working with MIT. It was fascinating how the two of us were balancing each other out.

Some of the stats he came out with and the things that he was bringing to everybody’s attention, were really good though. He said, “We owe it to our clients to prepare them for a future they may not have anticipated.” We always talk about people are going to be living longer and he really boiled it down into some of the reasons as to why people are going to be living longer.

For example, he talked about this whole gene sequencing of the human genome. Vince, in the 1990s when that was discovered, which was a huge discovery, it took 13 years and $40 billion to get it to the point where you could sequence the genes. By 2015, it takes $1,200 and three weeks. Think about what that does to personalized medicine.

According to Ric, pretty soon we’re going to have it as an app on our phones and it’s going to be free. Your doctor’s going to be able to look at that and figure out what is actually going to work for your genes and your make‑up. Isn’t that amazing?

He was talking about the CRISPR technology. That was discovered how many years ago? Just a few years ago. You can now replace bad genes with good genes. That’s a big deal according to Ric. By the year 2030 ‑‑ we got to make it to the year 2030, Vince ‑‑ that’s the key.

Vince: [laughs]

Patti: If we do, and when we do, diabetes, every form of cancer…There’s thousands and thousands of cancer. There isn’t really lung cancer. There isn’t really brain cancer, or stomach, there’s different cellular types.

When we understand how our DNA works, they can adjust the therapies for our cellular type to get rid of whatever it is with the cancer. You think about nanotechnology. It’s all about the atom.

They’re going to be able to create a chip, implantable into our brain, into our body, that will be an internal MRI, that’ll send a signal out to your doctor to say, “You know what, this particular cell divided incorrectly, which is basically what cancer is. It’s a cellular division that goes awry,” and sends it.

The doctor will get that and say, “Hey, Vince, you got to come in. We got to take care of the cell. It’s located in the lower part of your intestine. Let’s get rid of it, so it doesn’t create a problem for you.” How is that? It’s amazing some of the things that are coming out. It’s wonderful in many respects, but again we’ve got to be careful.

We’ve got to be cognizant of the fact that even when we run our numbers out now, how many times have you and I seen…We’ll run the numbers out to their 95 or 100 years old, and our clients roll their eyes and say, “Oh, Patti, I’m not going to live that long.”

We do have to prepare them for that. You think about if people do live to age 110, 120. They retired when they’re 65 years old. From a financial planning perspective, we must be ready for that. In fact, if we aren’t ready for that, we are doing a grave disservice to our clients, at least to have that as one of the scenarios.

The most important thing is, as we build each person’s plans, we’re not just running one plan. This is not like a blueprint that you never look at again. It’s updating every night with changes in the markets which we all know. Markets are plummeting right now.

It’s scary, but we’re not scared because we knew that this could happen. We had already run that scenario. We knew how our clients might be affected, each individual client.

Some people are not going to be affected and some people are. For those people who’re going to be affected by this 17 percent drop in the market, we’ve got plan B. We’re executing plan B. It’s a done deal. The best thing about it is they know it.

Again, not just financial security, peace of mind, we’ve got their backs. That is the most important thing, but I think we’re not doing a good enough job of preparing clients for a longer period of time that we might need this money to last.

It’s going to be some coaching involved and we’ve got to get the team onboard in that retreat. I need to teach them about, “How do you coach people around this idea that your life in retirement may look different?” I thought it was fascinating.

One of the ideas that Ric came up with, which I thought was cool was this whole idea of retirement, throw it out the window. Dr. Joe Coughlin, same thing, throw it out the window.

This idea of our careers being more of a cyclical in nature. You go to school, you learn whatever you’re going to learn. You get your first job, you’ll work there for 20 years, then you take a couple of years off, take a sabbatical, go back to school, learn something new.

As we get older, we may find what we are really get jazzed up about. You take a couple of years off, and you get trained, and you get the next job, and then you do that for another 20 years.

This idea of being permanently retired is going to be out the window that has important financial‑planning implications, that has important implications for quality of life, where people are going to live. Education is already transforming.

The good news is that hopefully, the student loan crisis that we’re experiencing will begin to dissipate because colleges aren’t going to look what they look like today. There’s going to be so much more online stuff.

Just to begin to help people reframe their thinking in terms of, “What do you want to do when you’re 75 years old? Are you sure you want to be watching television seven hours a day?”

Let’s take your gifts, your natural gifts and things that you are naturally interested in and maybe work towards something that you might be interested in and where you might be able to earn a nice income as well.

Vince: Multiple retirements.

Patti: There you go, multiple retirements.

Vince: Yeah, that’s one way around it. I know for me, I could only tinker with cars and things and garden for so many years before I’d be itching to do something again. If I’m going to live to 120, I’m going to want to do something. I want to keep busy.

Patti: Oh yeah. Vince, how many people ask me, “Gee, Patti, what are your plans for retirement?” and I look at them all, “I don’t ever want to retire.”

First of all, I am blessed. As many of you know who are listening to this, I used to be a nurse. I was an oncology nurse and then an ICU nurse. 30‑some years ago, I realized and I just felt like that wasn’t necessarily what I was meant to do. I got into this new profession called financial‑planning, and here we are today.

I love what I do. I get out of bed, “I am jazzed up about this,” and probably, even more, when we go through periods of time like we’re going through right now because that’s when people need us more than ever, is to have that person who has lived through…Boy, have I lived through things like this before?

It started with the crash of ‘87. You go through a 31 percent drop over a couple of days in the market and you learn quickly how to get people through a rough time of life. A lot of that is what I did as a nurse too. You think about their health and think about their money, but it’s important and it is interesting to think about what life could look like.

Vince: You have all these online classes available now. You had told me a story previously about Jack and taking an online course, and it’s not small schools. It’s not like you can get this little tiny university on some Island somewhere giving a class. It’s Harvard, it’s MIT, it’s Penn.

Patti: Absolutely. We’re all getting smarter as a result. People are getting better at certain things, smarter. You look at YouTube and you can learn anything. Let’s talk about the Internet.

We’ve talked about certain technologies and what they’re going to do, maybe some industries that are going to go out of business. If you get driver‑less cars, all of a sudden the crash economy is history. People are not going to be getting in car accidents. You’re not going to have the body shops. Claims adjusters, car insurance is going to look very different.

Then you look at other technologies. You think about the Drone Economy. Wearables is a $230‑billion industry already. Robotics is only a $40‑billion industry. I thought that was pretty interesting. 3D‑printing, Big Data, cybersecurity.

There are industries that are coming alive as a result of technology, the Internet, etc. This thing that we talk about the Internet of Things, as Ric says, it doesn’t quite exist yet, although it is beginning to exist. According to Stanford and what he’s learned, it’s going to be a $14‑trillion global business in just 5 to 10 years. $14 trillion, that’s huge.

The Internet of Things, as I understand it, Vince, depends on this 5G technology.

Vince: Absolutely.

Patti: Here’s the deal. As you know, my dinosaur of a Samsung phone is about to die. I just ordered this new phone that’s supposed to be 5G. What I’ve heard is that it’s fine that you have the capability, but it’s probably not going to do much for you. What is this Internet of Things? This is your area. What is this 5G all about?

Vince: Let’s go back in history. Remember the big bag phone you had in your trunk?

Patti: Oh yeah.

Vince: I’m got to plug it in to get 12 volts from the battery to be able to talk, and it was like a dollar a minute, whatever it was. That was 1G.

Patti: Oh my God.

Vince: Then all of a sudden you could text. You had Blackberries and little pagers and you could start to text from your phone. That was 2G.

Then all of a sudden you could get the Internet on your phone and you could go on a browser and look something up. That was 3G, but then all of a sudden it was so slow because more and more people were getting them. 4G, it made using the Internet livable on your cellphone.

The problem is there’s more cellphones and more cellphones, and now smartwatches and it hooks up to your car and it turns your lights on when you come home.

What we’ve created is what we know in Philadelphia here as gridlock traffic. If you’ve tried to go from the suburbs into the city on any day of the week after four o’clock, up until seven either direction of what week does Schuylkill Expressway, you’re going to sit for a while. It gets really, really slow.

The problem with the Internet of Things is you’re going to be introducing thousands of new items per person, potentially to this already bottlenecked system. 5G is 10 times faster than 4G. It’ll handle a thousand times the number of devices per tower. What we need is lots of more towers. We need infrastructure.

When Ric was talking, and he says it’s five years old, yeah, he’s probably right. We’re already negotiating these deals. We saw a 5G‑tower go up in this area within the last year. They’re starting to put them up. Once that bottleneck is opened, you’re going to see all kinds of neat things coming out.

When we talk about Tesla’s full self‑driving cars and all of this stuff, they all rely on that same bandwidth. It’s jammed and it’s under six gigahertz. From 6 to 300…Patti warned you that I geek out.

Patti: [laughs]

Vince: This is the geeking out part. Up to about 300 gigahertz is free space. It’s never been apportioned out to anything. That’s where 5G is going to live. It’s like building a new layer on the Schuylkill Expressway, a second deck and saying, “Here you go.”

In fact, we’re going to put a third, a fourth and a fifth deck on it and let you go.

Patti: That’s cool. I get it now. Beautiful. What can we do? Now that we’re having this conversation, I want you to begin to think about what that could mean for the people we serve.

How can we position our clients in a more favorable way? Whether it be through their portfolios, whether it be the quality of life, do we need to go out to their houses and help them hook up this toilet that does the samples right then?

Let’s start thinking big in terms of what we can do to prepare ourselves and our clients for this next wave of innovation.

Vince: Absolutely. That’ll be a fun brainstorming.

Patti: That’d be a lot of fun. I have to think about from a business model what do we need to do in terms of people because at the end of the day, technology is one thing you have to have bodies, you have to have people. We need to talk about that as well in terms of, “OK, what do we need? Do we need…?”

Getting back to Kevin Gaskell, I thought it was fascinating, Vince. One of the things that came out of their war room as he called it, was the idea of when someone’s cars breaks down on the side of the road, they used to send out tech people, engineers to try and fix the car right then and there.

When he came on board, they flipped it. They sent out people who, yes, could change a battery and yes, could fix a flat. They sent out people with customer service skills so that the first, what they wanted to change was the experience.

The first thing they said is, “OK, where were you? You’re on the side of the road. We are on your way to work. Did you need to pick up the kids? Do you want us to send somebody to pick up your kids? What do you have over the next two days?”

They basically would arrange for a new Porsche to be in the driveway before that person got back to their home, so they would have a car to drive over the next few days until their car was fixed. That is service. That is an experience. That’s the kind of experience that you and I need to focus on and build with our team.

Vince: 5G is going to let Porsche know you have a problem before the Porsche has a problem.

Patti: That would be cool if we all had Porsches, right?

Vince: Yeah.

Patti: Yeah, well, so much for that.

Vince: [laughs]

Patti: Our good old Ford, they’ll do just fine. Back to the whole idea. Instead of owning a car, we may be ordering a car. It’s a service. Not a product, and what does that look like?

Lots of things. We’ll just get everybody together. Let’s get everybody off‑site. There’s a lot more that I learned in Australia and New Zealand a lot about the virus and the implications there. We’ve already had an earlier podcast that we talked about that.

We’re meeting with the team later on today because we can’t wait. We’re being proactive. I was so happy to hear. I came in this morning and everybody was here. First thing before markets opened and already looking at rebalancing portfolios and doing the tax loss‑harvesting.

These are the things that people don’t know to do and don’t necessarily have the scale that we have here to be able to execute quickly.

Vince, I have you to thank for that. Before we came, we didn’t have that. We now have that. I don’t know that words will ever be able to express what a difference you’ve made for me personally, this business and the clients we serve.

Vince: Thank you. That’s so sweet.

Patti: Again, it is what it is. I love you. You’re the best. I’m so grateful that you chose my firm as the place that you wanted to hang your hat. Maybe not for the rest of your life, I hope so. We just get better and better because of you. Thank you for that and thanks to all of you for joining us today.

This was completely unvarnished. I said, “Vince, I’m bringing in my notes. It is what it is.” I hope that it gave you a little bit of insight in terms of what goes on here at Key Financial. You’ve been a fly on the wall. It is what it is. Thank you so much for joining us today.

If you have any questions, the show notes will be on our website at www.keyfinancialinc.com. Always, I’m a reader. I go and read the show notes to remind myself what in the world I talked about today.

Again, thank you for joining us. Thank you for sharing these podcasts. We do these podcasts to hopefully make a difference in your life and the lives of the people that you care about. Until next time I am Patti Brennan. Thank you so much for joining us today.

Ep47: Covid and Courage: Are Students Heading Back to College in the Fall?

About This Episode

In this special edition series of the Covid-19 discussion entitled Covid and Courage, Patti addresses the reality that so many in our nation are experiencing right now. What does your retirement picture look like now if you just retired – amidst a global pandemic? Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators and professional athletes, returns to ask Patti the questions that all new retirees might be asking right now. Listen to find out Patti’s answers and solutions – they might surprise you!


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Hey, everybody. We had such a great response to last month’s segments with journalist Gregg Stebben that we’ve decided you know what? Let’s do a series of episodes with Gregg – we’re going to call them “COVID and Courage” – that focus specifically on how the virus will continue to impact and challenge our lives and how we can face those challenges courageously.

Gregg, welcome to the show.

Gregg Stebben: Patti, It is great to be back. I’m really thrilled to be part of this, as you said, COVID and Courage because I’m constantly reminded that even if there’s a vaccine released tomorrow, the impact of this virus is going to be ongoing. I’m so thrilled that I get to talk with you about that.

Patti: You know what? I can’t thank you enough. Folks, Gregg Stebben is an incredible journalist and has interviewed presidents, members of Congress. He’s got his finger on the pulse of this COVID‑19 issue.

It’s amazing. Just to give you guys some inside baseball, we actually talked about what we’re going to talk about today yesterday. When it was all said and done, we said to each other, “Gee, I kind of wish we were recording then.”

Gregg: [laughs]

Patti: “I wish we had hit the record button.” It’s one of these things. It’s a terrific exchange. I think it’s just so important, Gregg. It’s such a frightening period of time. As you said, we might get a vaccine any day now, but really the implications of this are going to be much longer‑lasting.

What are people thinking these days? What are the people that you’re talking to thinking these days?

Gregg: It’s interesting you ask that because one of the big questions in my mind…I’m very curious to hear your take on it, given your position and the conversations you’re having with your clients.

It is graduation season. We saw the big televised graduation ceremony. High school kids continue to graduate. College seniors continue to graduate. Even high schoolers. It’s that season. It’s a very atypical season for all graduates. I’m wondering what you’re hearing and what you’re thinking about, not just for the kids, but for their families.

What’s the most effective way for them to go forward, given that many families’ futures are going to be very different than putting a kid in the car and sending them off to college?

Patti: Boy, I’ll tell you what, Gregg. I can’t think of a more important topic right now. For whatever it’s worth, I feel every parent’s pain. Our youngest, Jack, is graduating or was supposed to graduate in May. He is there still at school. It’s just a very difficult time as a parent.

I will tell you, with the people that I’ve spoken with, for a lot of parents, it’s like wow, it’s going to be a whole different ball game for these kids. They’re competing against 30 million other Americans for jobs. What do they do? What do we as parents do for those kids?

The implications are far‑reaching. I will tell you I had a conversation with a parent. They have two kids. Long story short, the parents are retired. These kids, the youngest, there’s an age gap between the two kids. The youngest is also graduating.

While this was all going on in March, he kind of panicked. He wasn’t using an advisor. He was calling me to get my thoughts. He panicked. He said, “I’ve got $5.5 million, but now I’m going to have to be supporting…” His oldest child had already lost their job. The youngest probably won’t be able to get the job that they anticipated they were going to get.

This parent was thinking, “Oh my goodness. I’ve just lost $1.5 million.” Gregg, he sold. He sold right near the bottom. Now he has permanent losses. He has been out of this market. He has not participated in this recovery. He’s asking, “What do I do now?”

Hopefully, everybody, those of you who are listening to this podcast, didn’t have to go through that and didn’t do that, but it’s human nature. It really is. You want to go for safety when you think about the implications, short‑term, intermediate, and long‑term, as it relates to your family and your own retirement.

Gregg: What’s fascinating to me about the story you just told and the time we’re in is it seems to me that generally when there’s an economic downturn, that the parents are suffering or fearful and either share that with their kids or not, but in this case, it’s happening to the kids and the parents simultaneously.

College graduates are worried about their careers. Parents are worried about their careers. Parents are worried about how they continue to support kids they thought would be on their own going forward.

I’m wondering if you can share with us some advice or stories of conversations you’ve had with others who didn’t sell and perhaps spoke with you earlier so that you could help us understand what advice you gave to them early on. Then let’s move to what advice you’re giving to parents today.

Patti: There’s two ways to approach this, Gregg. It’s really important to understand not just the financial but also the psychological. When we’re going through a crisis, for most people, you lose perspective. We all think that this is going to last forever. It’s really not.

It’s interesting. I listened to a podcast with Stephanie Bogan. She talked about how our brains work. We process 60,000 thoughts a day, but 80 percent of them are negative. You take that as a baseline, then you add a crisis on top of it. People are just plain old bummed out.

Unfortunately, what happens is it takes away creativity. It takes away this can‑do attitude and how can we turn this thing around. It’s really important, as parents, to set the example, to say, “OK, it isn’t the ideal situation. It isn’t the ideal scene. How can we think differently about this? How can we create opportunities that are going to come out of this whole crisis?”

First of all is to check in with ourselves and make sure that we’re not Doug Downer or Debbie Downer and bringing everybody else down along with us. Resilience is an important thing for all of us.

Now, more than ever, we need to be resilient. We need to think about all the wonderful possibilities that are definitely going to come out of this. They just are. They always have. They always will. That’s first and foremost.

For those parents who have already, that we’ve worked with, we’ve always gone into every year…We go into every day of every year, Gregg, assuming that the next awful bear market is happening today. To prepare people, it’s that emergency fund.

It’s interesting. I was having a conversation with my daughter. I was saying, “What are you thinking about right now, Kelly?” She’s a young adult. Tell me how you’re approaching all this. She said, “You know, Mom. I know that a lot of my friends are asking the question,” like, “What does an emergency fund look like during a period of time like this? Should we stop putting our money into our 401(k)s?”

I’m addressing this not only to young adults but parents. It is human nature to want to stop doing everything. I will tell all of you there has been no better time for you to shore up your financial affairs than now. Let’s face it. You’ve got a situation where you don’t have to pay the student loan, make those student loan payments. You’re good until September, the end of September.

You have a forbearance on your mortgage payments. Talk to your mortgage banker. Put those payments on at the end. Shore up your personal finances. Get those after‑tax, those savings accounts built up. Granted, you’re not going to make any money on them. I totally get it. It’s OK. That’s your rainy day fund.

Do you need three months? Do you need six months? I will tell you that those rules of thumb, Gregg, they came out of a lot of old, again, rules of thumb. It really has to do with benefits because most disability insurance does not kick in for either three months or six months. When people lost their jobs, it usually was because they were sick.

IBM, when you worked for that company, you never lost your job. It was a whole different mentality in the ‘60s and ‘70s. That’s when those rules of thumb came to be.

I would say that based on what we experienced during the financial crisis, and what we’re probably going to experience here, people who are underemployed, like those college kids that graduated in 2008, or the parents who are unemployed, we’ve got to be realistic in terms of how long it’s probably going to take to get back. Back to earning what you were earning.

For the kids, I will tell you, I would not hesitate. I would be more aggressive. I hate to use the A word, Gregg, but I would be more excited to get out there and look for the job of your dreams. Granted, there’s 30 million people that are unemployed right now. I got to tell you, 20 million of them think it’s going to be temporary.

They’ve been laid off on a temporary basis. They think that their company is just going to call them right back. Unfortunately, a lot of that is going to be permanent. While they’re enjoying their summer with this incredible unemployment insurance with that extra $600 a month, they’re not feeling that sense of urgency to hurry up and go back.

They’re enjoying this furlough. They’re going to have a great summer. Those kids and parents of kids, I’ll tell you what, get out there. Get on the phone. Talk to people. The persistence is going to pay off, I promise you.

Companies already are looking around saying, “OK, what jobs do we need to fill?” Any CEO out there, any good leader, I’m going to say, they’re out there and they’re looking. They’re going to say, “Wait a minute.” There’s incredible talent that is out on the streets right now they couldn’t talk to six months ago, because unemployment was so low.

Now, there’s a lot of people out there that are unemployed or on furlough. These new graduates need to get ahead of it, and really look for the opportunities. That’s a long answer, Gregg. Sorry about that.

Gregg: It’s very interesting to hear you say that, because what you’re really saying is, if you’re at home now, even if you haven’t done it to date, because this has been going on for a lot of weeks now, but for many people, it’s going to continue.

Not only is this a great opportunity to be networking and understanding the industry you want to go into, who the movers and shakers are, and getting to know them perhaps through LinkedIn, Twitter, or whatever your social media of choice is.

As I’m listening you, it’s also occurring to me that for your adult children who are at home, for you, as parents, this is a great time for you to pick their brains and understand how the world of work looks as digital natives, and for them to pick your brains as seasoned career professionals about how they can improve their skills and their understanding of the world of work.

If you’re at home together anyway, why not set up your own little personal family MBA program, which this is that opportunity, as opposed to, as you said, just waiting and hoping they’re going to call you back because, also as you said, the unemployment picture has done a complete 180.

Whereas, six months ago, we would have been talking about the war for talent. Now, all those jobs can go to companies who are willing to look for the best talent instead of perhaps the talent they have that they were a little dissatisfied with, but didn’t feel like they had a choice.

Patti: Absolutely, Gregg. I got to tell you something. That is brilliant. I’ve always believed the best investment you’re ever going to make is in yourself, is in your own learning. As dire as the unemployment picture is right now, the difference between people who have a high school education and a college education is incredible.

Right now, the unemployment rate for people with a high school education is 18.2 percent; the rate for someone with a college education is 8 percent. Still ridiculously high. Let’s take advantage of this time to take some classes. Learn QuickBooks. I can’t help but think that there’s going to be new jobs out there that didn’t exist six months ago.

Think about it. I’m thinking about my own company. I’m thinking, “Gee.” We’re too small really to have a human resources division, if you will. Think about it. You’ve got chief information officers, chief financial officers. You’re going to see a lot of chief medical officers checking into, “How are our employees feeling? How are they doing?”

They’re going to be taking their temperatures every morning. They’re going to be checking in to make sure that they are healthy, safe, and practicing all of the social distancing that we’re supposed to be practicing. That’s just one example of ways that everybody can be creative. Create a job that doesn’t exist right now.

Even with my own son, Jack, I said to Jack, because he’s out in California. He has not been able to get home yet. With my own son, Jack, I said, “You know what, Jack? Here’s the deal. There’s a lot of need out there that people aren’t really aware of. For example, tracers.” What’s a tracer? He’s like, “Mom, what’s a tracer? I never heard of that.” None of us heard about that six months ago, right?

Gregg: That’s right.

Patti: I said, “Jack, here’s the deal. If someone tests positive for this virus, what’s really important to control it is to figure out where they’ve been in the last two weeks because they were contagious. Even though they may not have had symptoms, they were contagious.

To really control this virus, we need people to be in touch with those individuals and trace their steps for the last two weeks. That’s a big job. Why don’t you call your county or your local government and see if there are opportunities for you to be a tracer?”

If nothing else for you to even volunteer to do something like that, think about your resume six months from now, a year from now, and say, “You know what? I went to my county and asked how could I help?” Go to the hospital. They’re not allowing visitors to come in. Can’t you stand outside and be that temperature taker for the hospital? Be a volunteer.

Again, you’ll meet a lot of people. You’ll make a lot of contacts. You got to think differently. What is happening in our world, in our country right now that wasn’t going on six months ago that there’s a need?

Gregg: I want to switch gears here a little bit, Patti. I want to talk about some nuts and bolts financial advice. Again, I want to focus more on the parents than for adult‑age kids, or even high school or college‑age kids. What should parents be thinking about things like, for instance, their kid’s out‑of‑state tuition and 529 plans?

Patti: It’s a great question. You think about it. We have another client whose kids go to out‑of‑state schools. With COVID, the kids are now home. They’re finishing their classes at home.

The parents are saying, “I’m paying this $50,000 out‑of‑state tuition and I’m wondering, gee, what are we really paying for? That’s a lot of money. By the way, what’s going to happen in the fall? Are the kids going to be coming back to campus?”

It also makes you wonder, or at least it makes me wonder as a financial planner, education is probably going to look different in the future. Should I be recommending that clients fully fund these 529 plans if they’re going to be sitting in their bedroom taking classes?

I’m not sure that’s a great idea, especially given the fact that they get taxed at ordinary income instead of capital gains rates and you get a 10 percent penalty if it’s not used for education.

It really does beg that question of what does college look like in the future? I’m not saying it’s going away. I’m not saying campuses are going away or any of that. I do think that we all need to think differently as it relates to how we do financial planning and where are your resources, which are so precious.

Everybody’s got a limited number of resources. What is the highest and best use of the money that you’ve earned and the money that you’ve been able to save? That’s number one. I would probably de‑emphasize the 529s. That would be one aspect.

During this period of time, it’s really important to understand what the foundation of your finances look like. For example, do you have a home equity line of credit? I got to tell you, Gregg, that is the best emergency fund out there. You may never use it, but everybody should have a home equity line of credit.

I’m also going to tell you, please, of all times, don’t let your FICO score drop. I just heard a report that the credit card balances are actually growing. It doesn’t surprise me. I hope nobody listening today was one of them, but it wouldn’t surprise me for those people who didn’t have that money in the bank, didn’t have the emergency fund, and they’ve just been furloughed.

If they looked at their credit card and said, “You know what? I’ve got a balance of,” pick a number, “$3,000 but I can go up to 5,000.” They pull the extra $2,000 out just to stick it in the bank with the idea that, “Hey, it’s a non‑recourse loan. If I can’t pay the credit card balance off, so be it, but I’ve got this $2,000 in the bank.”

I will tell you, that will come back to haunt you. Don’t do those things. Keep your FICO score high. As a business owner and businesses have learned that relationship with your banker is so important. Wow, what a difference that made during this period of time.

You really want to be able to be in a position where if you even needed a personal loan, you can go to the bank and get a personal loan. It’s not going to be a three or four percent interest rate, but at least you’ll get the capital to bridge the gap until you’re able to get back to work. That is really important.

A lot of people also worry about medical insurance and what to do with that. If you’ve been laid off, of course, there’s COBRA. This is going to be a very interesting tax planning year. Keep in mind, COBRA lasts for 18 months.

If your income is going to be low, I would definitely take the COBRA, but also take a look at the exchanges, the Obamacare, the ACA, because you can get great insurance for a family and with the subsidies. If your income has gone down, you can get great subsidies and you might get better insurance at a lower cost by going on the ACA, on the exchanges.

There are always options. Sorry, Gregg, I’m really going off here. Stop me at any time. I tend to get on a roll. During March, and we might get another opportunity, but when we go through periods of volatility like we are going through, take advantage of that time to do some tax loss harvesting.

Now, what’s tax loss harvesting? In English, it’s this thing that none of us wants to do and you’re not doing, which is sell your investments at a loss. Right away, you’ll take the loss and, in that same day, you’re going to move it into an investment that’s pretty much the exact same investment. You’re really just creating a tax benefit.

That’s all you’re doing. You’re not changing the integrity of your portfolio, but now you have a tax benefit. Tax loss harvesting is powerful, because even if you can’t use that loss this year, you carry forward until it’s all used up. It’s like a great little bank account. Given where we are and the amount of stimulus, we just have to be real. Taxes are going to go up.

With that in mind, I would also take a look at does a Roth conversion make sense? Now, I don’t know what taxes are going to look like a year from now. I have to believe that three years from now, they’re going to be higher than they are today. Honestly, a lot higher.

The government can’t do $3.2 trillion of relief or stimulus. I will tell you, compared to $800 billion during the financial crisis, just to give you some perspective, it is a lot of money that they have put in to this system, and they don’t really have it. They do but they don’t. We’ll talk about it if you ever want to talk about it, Gregg, another episode on the government debt and the deficits.

Let’s face it. We went into this thing, and people were already talking about the deficits. What’s it going to look like now? There’s going to be a higher tax for all of us. What do you do now in anticipation of that? Let’s be proactive. Let’s not sit back and just let this stuff happen.

Don’t ever be a victim of circumstances. I can’t tell you enough, there’s so much opportunity right now. Take advantage of the opportunities that are right before us. Don’t be a victim of this circumstance. It happened. What are you going to do about it?

Gregg: My real takeaway from this, Patti, is first of all, the fact that you could continue to roll off the tip of your tongue so many things about what I could and probably should be doing about my finances and for you, you don’t even have to think about it. It’s just what you focus on every day.

I’m thinking to myself, when I’m sick, I go to a doctor. When my car has broken down, I take it to the mechanic. I’m realizing for most of us, there’s no way we’re going to know all of the right things to do and which things to avoid without the help of a professional, like a doctor.

I just want you to take a minute and talk about, if I’m listening and I’m realizing as I’m listening to you, I really need professional help to get through this in the best possible way. What happens if I reach out to Key Financial?

Patti: I can speak for myself. Advisors handle these things different ways. I’ll tell you, I had a conversation this morning with somebody who had called in. We’re getting a lot of calls, you can imagine. When things are uncomfortable, we get a lot of calls.

Here’s the thing. This is why we’re here. We’re here to help people. They were just really worried. They were scared. I sent them some information. I sent them a questionnaire. I said, “Fill this out because we don’t want to waste time on the phone asking questions like what’s your address, phone number, all that stuff.”

They filled it out. It was awesome, Gregg. If I can say from their perspective and my perspective, I was able to hit the ground running and give them very clear ideas, some dos and don’ts that they could apply right away. For them, it was like low‑hanging fruit. I said, “These are the things, if I never talk to you again, do A, B, and C.”

They happen to also have just been laid off. There are some major mistakes people often make when they’ve been laid off. I just wanted to make sure that this person who I talked to this morning did not make those mistakes. I just laid them out over the phone. They were just so grateful. They’re like, “I cannot even believe that you helped me this much in one hour.”

It was great. It doesn’t always happen. To answer your question, I always offer that free consultation. It’s usually face to face. I will tell you, I prefer face to face because then, people can bring their tax return. They can bring their 401(k) statements. They can bring all of their stuff, their wills, and their trust.

Right then and there, we hit the ground running. I can look at it and get a quick overview of where they are, what they’re worried about, how they’re feeling about things, their risk tolerance, their risk capacity, cash flow. Then we’d get into solving problems, because that’s what it’s all about. Let’s solve problems. It doesn’t matter.

I mean it, Gregg. When I start out with this show and talk about whether you have $20 or $20 million, that person who is listening today that has $20 million, let me tell you something, honey. They have problems. You don’t think that they do. They have things that they worry about. Everything is relative.

I can’t begin to tell you, I have people in all walks of life. There’s just things to think about. Think about that person with $20 million during this downturn. Guess what? Now, they have $12. That’s a big hit. That person spent an entire lifetime accumulating that. I don’t care how sophisticated it’s there, it’s scary.

It’s so interesting to talk with money managers during this period of time. It is so interesting, you can hear it in their voices, the fear. I’m thinking to myself, “Wow, this is really an important period of time for us to keep a clear head and understand that this is happening, etc., but not freak out to the point that you get paralyzed.”

That’s where there become some issues. You got to be nimble. You got to be proactive and understand that these things are temporary. The damage can be very long‑lasting, or at least the opportunity costs can be very long‑lasting.

Because the people, for example, Gregg, that did not rebalance their portfolios in March, wow, did they miss an opportunity? Because they could have gotten the exact same investment at 40 percent cheaper. Hey, same car…

Gregg: Could they be better off today than they were when they…

Patti: Yeah, because market’s doing fine. Now, those people have already recovered. How about that? If they had rebalanced their portfolio and then went into a nice, convenient coma, let me tell you, they’re very happy right now. It’s what you do when these things are happening that make all the difference in the world. Again, a long answer to a great question. I will also say there are lots of good advisors out there. I’m hoping that we’re not the only ones that do that. Again, I’ve gotten to the point in my career, this is really a mission more than anything else.

Gregg: One of my takeaways, and I want to thank you, Patti, is you’ve really reinforced for me that the worst thing I can do today, regardless of what I did in the past few months, the worst thing I can do today is to do nothing and to have no plan.

I feel better having talked to you because I see, as you said, there are so many opportunities out there, both financially in terms of career, and really so many opportunities to look at what’s happening with an optimistic point of view, and to use that optimistic point of view to see that we’re going to come out of this fine if we continue to have that optimistic point of view.

I want to thank you for letting me join you on the podcast today. I’ve gotten a lot out of it. I’m sure those who are listening have gotten a lot out of it as well.

Patti: Gregg, I can’t thank you enough. You just pull it out of me. Like I say, you ask the question and then you let me just go off. I’m so grateful to you for spending time with me, and all of the folks who are listening today. For those of you who are listening, I want you to know that we are here.

We’re here to help you and answer any questions you might have. If this has stimulated anything in your minds, if you’ve got a question, if you’re wondering, “Gee, how come this isn’t happening in my life?” or “What do I need to do in A, B, and C?” whether it be taxes, your portfolio, your medical insurance or anything, feel free, give us a call.

Go to our website at keyfinancialinc.com. Until next time, and there is a next time, we’re going to do more of these with Gregg Stebben. He is America’s journalist, as far as I’m concerned. Gregg is just so relatable and just really has that same heart that I hope that you’re seeing here. It’s all about the heart, and boy, does he have one.

Gregg, thank you so much for joining us and thanks to all of you as well. I hope you have a great day.

Ep46: Covid and Courage: What if I Just Retired?

About This Episode

In this special edition series of the Covid-19 discussion entitled Covid and Courage, Patti addresses the reality that so many in our nation are experiencing right now. What does your retirement picture look like now if you just retired – amidst a global pandemic? Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators and professional athletes, returns to ask Patti the questions that all new retirees might be asking right now. Listen to find out Patti’s answers and solutions – they might surprise you!


Gregg Stebben: As an Interviewer, I have learned many times that sometimes the best stuff is the stuff that get’s said before or after the Interview actually begins. And in this particular segment, Patti and I actually thought the mic was off at one point when we continued to have frankly a really remarkable powerful conversation about this intersection between retirement and Covid-19. Unbeknownst to us, her producer kept the camera and the recorder running and so we’re able to share that conversation with you. We’re quite delighted even though we didn’t know it was going to be part of the interview. You’ll hear this at about 34 minutes and I hope you enjoy that part and the entire interview.

Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Hey, for those of you who’ve been tuning in, you probably know that I’ve had an incredible guest with me over the last couple of months. His name is Gregg Stebben.

He is what I refer to as America’s Journalist. He’s just amazing. He’s got such a great way of pulling out information that is really relevant for all of you who are listening. We’ve decided to take this wonderful relationship that we have and produce a series of episodes that are really focused on COVID and courage.

In other words, depending on what season of life you’re in, what are some of the things that you might be thinking about? By the way, it was all Gregg’s idea. Gregg Stebben, thank you so much for joining us once again.

Gregg: What a great introduction. It’s really perfect because I want to ask you something Patti, that is very selfish because it’s all about me. I don’t think it’s just all about me.

Something happened to me and my family at the end of 2019, that I think has been happening to a lot of people, before many of us even heard of the coronavirus or COVID‑19. The thing that happened to me and has happened to a lot of my friends is my wife retired. I have a lot of friends who are retired, all at the end of the year.

I could share with you but I think I’m going to keep it private, what impact the coronavirus and COVID has had on my wife’s retirement in my house, and the conversations I’ve had with my friends who’ve retired, about how this has changed or hasn’t changed their thinking about retirement.

Rather than do that, I’d rather hear from you about what people should be thinking about, who retired before they heard about coronavirus, and ways they might be thinking about this in the most productive possible, in the most positive possible way.

Patti: Greg, first of all, thank you so much for sharing that with us. Speaking of courage, it takes a lot of courage to say, “Hey we’re in this too. We made some decisions, and frankly, might be second‑guessing some of those decisions. What should we be thinking about today?”

What’s wonderful is that there are so many people who are listening, who are in that same exact situation.

I will tell you that for those people who have just retired, I got to tell you, welcome to your worst‑case scenario. We, financial advisors and planners, we backtest and run simulations. Part of the planning that we do is to say, “OK. You’d like to retire in six months, a year, two years from now.

“Everything is looking great right now, but what if the month that you retire, we get hit with this wicked bear market, like a 40 percent decline? Would you still be OK?” Now, really, it comes down to the math, but it also comes down to what you do when it happens. Yes, we’re in the worst‑case scenario for your wife and for many people who are listening.

I just know you already, Gregg. I know that you guys have prepared and thought about this period of time, and didn’t assume that the last 10 years or that didn’t assume I should say, that the next 10 years is going to be like the last 10 years. Let’s face it. It’s not. It’s a scary period of time.

The economic recovery is going to be probably very slow, because of the massive amount of unemployment. You have to go back to the depression when we’ve seen unemployment at this level. Now, nobody really knows, including Patti Brennan, whether this is going to be a three‑month deal, a one year deal, or a 10‑year situation like we had in the depression.

When I compare and I think about that period of time, to this period of time, or even the financial crisis, unemployment got up to over 25 percent. We’ve got to be realistic. It’s going to be up over 25 percent now. When you hear that…and I mean this sincerely to you and everybody that’s listening. We’re going to hear it.

Everybody’s going to be on the TV saying it hasn’t been this high since the depression, and therefore, we’re going to go into another depression. I don’t believe that that is the case. The reason that there was such a dramatic downturn during the ‘30s is that GDP didn’t just go down for a quarter, which it will go down.

It will be awful this second quarter, Gregg. It will be awful. Just be prepared. It might even be prepared for the third quarter. During the Depression, that downturn was 25 percent. It lasted from August of 29, all the way through to I think it was June of 1933.

That is a long time to have negative growth. The question is, is how quickly are we going to come through this? We have to make sure that everybody understands the difference between the economy and the stock market. They are definitely not the same. Keep your investment decisions separate from what you do, from an economic perspective.

Gregg: I’m so glad you brought that up, the question of whether we will actually see a depression or not. You and I talked about this in an earlier podcast. I found great comfort in what you said then. I again find great comfort in what you said. One of the things that I suspect has changed from 29 to today…well, two things.

One is I don’t think we have the safety net that we have today, the social safety net. I also think that there’s a sophistication and understanding of how economies work, that we didn’t have today.

Frankly, in your role as a financial advisor, you’re part of how the wealth of knowledge and experience, and knowledge about the economy, gets out to us as consumers, that I just don’t think existed back then. I think back then if you were a Vanderbilt, you had a financial advisor. If you were J.P. Morgan, you had a financial advisor.

I don’t think most people had a financial advisor and didn’t get the benefit of that. What kinds of questions are your clients asking you, that you are able to answer for them that you can also answer for us, that enables us to see that, as you said, the future will be tough? It’s going to be short term, and we’re going to come out of this, and in most cases, we’re going to do just fine.

Patti: It’s a great question. You’re absolutely right. The questions that we’re getting are different questions. They are the questions such as how long do you think this is going to last? Do you think that we’re going to go into another depression? What should we be doing if that is the case? Should we be moving our money into really safe investments?

Gregg, if we were having this conversation in the year 2000 even, let’s even take the more recent, recent past of the 2000s. If you had a million dollars, I could say, “You know what? Let’s put all of that into a 10‑year treasury bond.” Guess what? You’d get 6.6 percent. $66,000 of guaranteed income and chances are you’d probably be really happy.

Fast forward to today, you do that same thing, you’re going to get maybe $6,500 a year. Now, I don’t know about you, but I don’t know many people who can live on six grand a year.

Gregg: A month might be tough, frankly.

Patti: Exactly. It’s a very different environment, so the things that we do need to be different. There’s a theory out there, and I think it’s a good one. It’s called TINA. Have you ever heard of it?

Gregg: I have not.

Patti: TINA stands for, there is no alternative. In other words, we could move all this money into the money market account, but guess what? You’re not going to earn anything. We could move it into bonds, but as I just said, you have to lock in for 10 full years and get 0.65 percent.

Does that sound like a good decision, when, frankly, you could put it into the S&P 500 and get a dividend of 2.2 percent? Now, granted, it’s not six percent, but you get paid to wait. You get the opportunity to just say, “OK. I’m not going to panic. At least I get this dividend.”

What’s really interesting about that is that dividends are a lot more resilient than people realize. Yes, Disney, they cut their dividend. They’re no longer paying their dividend. Not permanently. They just made that decision to get through this period of time. On average, during really bad bear markets, the dividend rate goes down.

It goes down by about 10 percent. Now you’re only getting two percent. You have to have most companies stopping paying any dividends whatsoever, to get down to 0.6 percent.

Again, we have to do differently. We have to think differently during this period of time because guess what? It is different. Now, it’s not to say that all of the rules of thumbs, and the principles that we use that have been time tested, it’s not to say that we’re going to abandon those principles.

That’s so important that everybody listens to that statement. There’s a reason why they are used because over time they work. The importance of diversification. Yes, I totally get it. Having money in international securities has not worked out in the last 10 years. Let me ask you a question.

You think about the trillions of dollars that have been pumped into our economy. What do you think that might lead to? Gee, do you think that the value of those dollars might go down? Probably. What happens to international securities when the dollar gets weaker, international securities outperform.

Now, I’m not saying that’s going to happen. Given the massive amount of stimulus, and the printing press that is spewing out massive amounts of dollar bills down in somebody’s basement, that somehow it’s going to have some ramifications. I just want to make sure that everybody is positioned not for what happened in the last 10 years, but what might happen in the next 10 years.

Most of all, let’s not abandon the principles of diversification, because over time they work.

Gregg: One of the things I’m thinking about as I listen to you talk about this, and as I shared, it’s very real for me and my family, is that we need to avoid fear and embrace flexibility. We had a plan. Sure. We thought, “Oh, maybe we’ll go 30 or 40 years of retirement with no downturn.”

We didn’t really believe that, but we certainly didn’t think that it was going to come two months after the retirement began. That’s where I suspect being flexible, and being open‑minded, and turning our back on fear becomes very important. I know that when I’m afraid, I make really bad decisions. The last thing I want to do right now is make things worse by making bad decisions.

Patti: Absolutely. It’s human nature to think of, and really be much more conscious of all the negative stuff, and of all the bad stuff that is going on. That’s human nature. Understand it. I think that that’s the beauty of planning. You’re absolutely right. We run those numbers also out 30 years.

I always tell people, “Hey, you know what? These numbers look very exacting.” Let me give it to your real. You are not going to have exactly what that number says you’re going to have when you’re 95 years old. It just gives us a feel for the trend. To me, the most important thing is stay in that three to five‑year range, and be adaptable because things do change on a dime.

We’ve seen that time and time again. You always have your plan A, and you got to have Plan B so that when those things happen, you don’t have to think. The problem is, is that people think. That sounds really weird. When you have a strategy that you can go to, if certain things happen, then you can just flip on that switch and go to that strategy.

It’s like, think about it this way, Gregg. Think about it as having almost two budgets. You’ve got your budget, what you want to have coming in. As your wife is now retired and everybody that’s listening who has retired, you’ve got the things that you want to do during retirement.

You have a second one that says, “If we need to tighten the belt, here’s where we go.” You just say, “OK. We’ll go to plan B.” It’s not permanent. At least it never has been. We’re going to get through this. I think that just having those strategies in place in your back pocket, to just go ahead and go and execute them, that’s really the most important thing.

To your point, I think Americans are far more adaptable than I think we give ourselves credit for. I think that to have that, as you guys talk about these things, to say, “Well, OK. This isn’t the worst thing that could happen.” We’re just going to have to go plan B.

To me, the most important thing, and I’m going to bring this up again because I know that we’ve talked about it before, is that for anybody who isn’t retired, or as you’re approaching retirement, or even in the beginning years, when things like this happen, just try not to sell those stocks.

You have a portfolio. It’s a long term portfolio. You don’t want to be in a position where you’re forced to sell low because you need the cash flow. You have that zero to three‑year money safe and secure, you have your three to six‑year money in case it lasts a lot longer than then we hope, and then you have your longer‑term money. That is that money that is the growth‑oriented investments.

That’s your hedge against inflation. That’s why understanding what your cash flow needs are is really important. You take three years of what you think you’re going to need in the next three years, and you put it into much more stable investments, things that aren’t going to be as volatile. That way, as things like this occur, you just use that money, so you can leave everything else alone.

Gregg: I want to ask you, what may be an off the wall question, Patti.

Patti: I love your off the wall questions, Gregg.

Gregg: We’re in this very unpredictable set of circumstances. It’s unpredictable today in the moment. We didn’t even see it coming, so it was unpredictable as it unfolded. It’s going to be unpredictable going forward.

What it actually makes me wonder is, how is this set of circumstances for you, much like your previous life of being an ICU nurse?

Did you learn triage, and adaptability skills, and knowledge, and gain experience there that helps you help your clients today?

Patti: Yeah. It’s a really good question, Gregg. I think that for me when you’re taking care of a patient in ICU, you know that they’re sick, you know, that they’re vulnerable, you know what’s normal for them, and what’s not normal right now. For everyone who’s listening, you know what it was like for you last year, and now it’s different.

You’re vulnerable. Everybody is vulnerable. I don’t care what your net worth is, you’re vulnerable.

The question for me is, as it was for that patient, as that nurse, because we didn’t have the doctor that was at the bedside all the time. When a patient crashes or their vital signs go the wrong way, we don’t have time to chit‑chat on to get the doctor on the phone. They’re probably asleep if it’s in the middle of the night, or maybe they’re in surgery.

We’ve got to know what to do as soon as it’s happening. That training has been very helpful. Perhaps the training and the ability to communicate and understand that that patient, even if they’re not crashing, they’re scared to death.

I will tell you, when people retire, even in a good market, there’s that feeling of ambiguity, of “I’m retiring right now and things are going really well, and I’m going to be OK. I hope I am.” Then you add something like this, Gregg, it’s a scary period of time.

For me, perhaps the most rewarding thing that I do every day is to talk with people and walk them through the fact that we knew that this could happen, and we’ve been prepared and we’re going to get through it. That long‑term, this is going to be a bad memory, but it will be a memory. It does not have to affect their financial security one iota. To keep that perspective is very important.

Now, I will also tell you that it’s not just talk. Just like when that patient is very sick, there are certain things that have to be done. You’ve got to give the right medicines. You’ve got to watch the signs. You’ve got to understand. You’ve got to check the dressings. You got to make sure that they’re not bleeding out, their O2 levels. Check the ventilators, suction them.

All of those things have to be done. If I translate that into a client’s financial affairs, especially someone who is retired and especially in this environment, there are so many awesome things that we’re doing that people can be doing right now. Let me give you a couple of examples.

Think about the CARES Act. We have this massive legislation that is affecting businesses. It is affecting those people who are unemployed. Guess what? It’s affecting people who are retired in a very big way. Think about it this way. Anybody who is retired, who may be subject to required minimum distributions. Guess what? This year, you do not have to take a required minimum distribution.

That’s a big deal, especially if there are other ways to get cash flow, because if you’re not pulling that money out of retirement plans, A, it can remain invested to recover and, B, you don’t have to pay the taxes on that money. Isn’t that pretty cool?

You think about that and say, “OK, if I’m not paying taxes on that money, then that means that my tax bracket is going to go down.” That’s absolutely right. There’s a domino effect in every decision that we make.

In this case, it’s a positive side effect, because this side effect for many people means that they’re going to end up in a 12 percent tax bracket. You might say, “OK, Patti, what’s the big deal there?” First of all, I think, five years from now, we’re going to all be looking at each other and say, “12 percent tax brackets actually existed?”

Gregg: [laughs]

Patti: How about that? Taxes are going to have to go up. Let’s optimize this environment. For anybody that might have stocks that had actually gains, like you might have been with a company and you might have a low cost basis. Did you know, for example, that if you take your gains and you’re in a 12 percent tax bracket, how much tax do you think you pay? None. Zero.

This is different than a concept that we talked in our last broadcast called tax loss harvesting. In tax loss harvesting, there are certain rules that basically it’s called the wash sale. Here, you can literally sell your Pfizer stock, take your gain, and then rebuy it. You don’t have to wait 30 days like you do with a loss.

This way, you’re paying your taxes. You’re in a 12 percent tax bracket. You don’t have to pay. There’s no out‑of‑pocket cash that you’re paying, and you still own the stock. That’s pretty cool, isn’t it? That’s just one example. People who are charitably inclined really want to help their local hospitals.

This concept of qualified charitable deduction still exists, a QCD. Take that money out of your IRA. It’s a great place to go. That will especially be important next year. You might want to make a pledge, because we don’t have to take money out this year, but make a pledge to the hospital and say, “On January 2nd, I’m going to take money out of my IRA and that’s going straight to you.”

That’s something called an above‑the‑line deduction. Again, a domino effect that has a tremendous impact on how much money you end up paying. There is a number of things that this crisis, as with every crisis, there are some opportunities that are created.

Gregg: What’s interesting is that when someone retires, especially if you retired at the end of 2019, and this has been your first quarter of retirement, no matter how big your plans were for your first quarter of retirement, you probably didn’t get to fulfill them. You’re home. We’re all home. We’ve got lots of time on our hands.

I actually wonder if you’re finding that for some of your clients, being stuck at home, retired or not, having negative consequences because there’s lots of time to do things like listen or watch the news. Are you seeing that people are perhaps getting more fearful or more concerned than they really need to simply because they’re overdosing on lots of bad news?

Patti: Absolutely. I’m so glad that you brought that up, because if you’ve got the TV on all day long, that is definitely going to affect how you feel. We all know about clickbait. We all know that negative news sells a lot more than the positive news.

CNBC’s ratings, their ratings right now are higher than they were even during the financial crisis. They’re getting tons of advertising dollars. Remember that they’re in business. That’s what they’re trying to do. They’re trying to get as many eyeballs watching CNBC so that they can charge more money for their advertising.

Just understand that’s the way that game is played. You’ve got to understand that that’s going to have a negative impact. It’s interesting, I was reading this over the weekend. Do you know what the number one disease in the world is right now?

Gregg: I’m going to guess that it’s diabetes or heart disease.

Patti: Both are great, great guesses. Diabetes has significantly increased, especially in the United States. Heart disease is often the first thing, or cancer. The number one disease in the world is depression. More people are being treated for depression than any other ailment.

It’s only going to be more, whether that treatment is pharmaceutical, whether it is going to a psychologist or a counselor. Nothing increases anxiety more than watching television and hearing all the bad stuff, especially for somebody who just retired, who was already going to be feeling that ambiguity.

You think about how those people and everybody is feeling that, “Geez, did I make the wrong decision?” That feeling of remorse, especially now because they can’t do anything about it, because guess what? 30 million Americans are unemployed right now. It’s not like people who just retired can just go back and call their boss and say, “OK, can I come back to work?” They’re going to say, “No.”

In fact, not only are we not hiring, we’re looking at laying more people off. It is a scary period of time. As you said earlier, that fear, we can’t let that fear dominate to the point where it affects the decisions. Feel the fear, it’s OK. It really is OK.

I get back to that patient. They’re scared to death. They’re worried and they don’t have any control over what’s happening to their bodies. They just have to trust the nurse, the doctors. They just have to trust their medical professionals.

People who just retired, you’ve got to trust that you’ve made the right decision. If you have any questions about that, call an advisor, get a second opinion. People like me give free consultations. Sometimes you just need to bounce these things off of someone else to get a sense of, “Gee, am I still going to be OK? What should I be doing?”

A lot of people have frozen. They don’t know what to do and, therefore, they’re not doing anything. I would say right now, inertia is not a good thing.

Gregg: I’m going to open a bottle of champagne before dinner tonight, and I’ll tell you why.

Patti: Yeah, I’d love to hear why.

Gregg: We’re going to celebrate tonight, and I’ll tell you why. You just made me realize something that I would not have even figured out on my own. The reality is, because my wife retired when she did, she knew when she was going to leave the workforce and had the luxury of time to prepare for that.

Now, we didn’t expect what happened. She had the luxury of time to get herself psychologically ready and get us as a family financially ready. That’s something to celebrate, because as you just pointed out, lots of people are unemployed and had no time to prepare. They don’t even know when they’re going back.

We have a really good idea of what our future looks like. That’s a whole other conversation if you’re in that position of not being sure if your job’s coming back or not. Maybe we’ll talk about that in a different segment.

If you just retired and you’re kicking yourself, maybe it’s time to step back and say, “Wow, was my timing amazing? Because I actually got to plan this instead of just being dumped out of the workforce with no advanced knowledge.” That, to me, is worth drinking to.

Patti: I have to agree with you, Gregg. That is a beautiful way to look at this. You do. That was a decision that you and your wife made. It was made for all the right reasons. There is absolutely no reason for you to second‑guess that. You did the right thing. She did the right thing. You guys are going to be fine.

To your point, it’s the people that have been retired, if you will. The layoff is basically a permanent retirement for many of these people who are in their late 50s, early 60s. They weren’t prepared. They didn’t have the time that you guys did. They’re faced with different decisions. Again, this is where an extra set of trained eyes might come into play.

Again, it’s not about Patti Brennan and Key Financial, it’s about you. It’s about the individual and making sure that you’re still going to be OK. Again, I always come back to it’s got to have some substance. It’s got to be this is the time to be proactive, not reactive, and to really understand the implications short‑term, intermediate, and long‑term.

We don’t really know the long‑term. All we can do is deal with the short‑term, and frankly, the opportunities that are right before us. That is the most important message here.

Gregg: You did a great job of really laying out some of the opportunities right in front of us. I want to ask one last question, Patti. You mentioned that most financial advisors will give a free consultation.

If I’ve never spoken to a financial advisor before, or I’m in a set of circumstances where I think maybe it’s even time to change financial advisors, how does that…I probably shouldn’t say that. Let me go back and say that again.

Patti: No, that’s OK. There’s a lot of people who are calling who have advisors and who have not heard from their advisor. This is a sidebar. I will tell you that when things like this happen, in terms of communication, I am calling people 24/7 on weekends. I had a client. I called a client. It was a Saturday, just because I’m not keeping track at all.

This client said to me, we talked for over an hour, he said, “I really appreciate that you called me today.” He said, “I know that you are really busy. I know you’re the CEO, but the fact that you took the time to call us really means a lot to me.”

It really was like, “Wow,” because, yes, they have different people in the firm that take care of them, but sometimes you just need to hear from your advisor. That’s what I’ve done. I’m talking to everybody, checking in, and sending out emails, letters, action items, and things that we’re doing and that they might want to consider.

It could be even about car payment. Should you turn your car in that you’re leasing and buy one and get zero percent financing for the next six years. That might be a really good idea. There’s just some things to think about the people may not realize. It’s not until you’re having the conversations that they come up. Does that make sense?

Gregg: It makes perfect sense.

Patti: They call it money in motion. I’m going to say this because we’re offline. I believe it’s times like this that separate the cream from the crop.

The advisors who are so dedicated to their clients, who are willing to go above and beyond no matter what time of day it is or what day it is, to reach out, check in, look at the financial plan, look at the portfolio and say, “Here’s what we’ve already done for you and here’s what I think we should consider.

What do you think? Now what questions can I help you with? What are you worried about? Let’s get it all out on the table because I am yours. And, and all I can do is help as many people as I possibly can, get the word out, do these podcasts and say, “Yeah, if you want a second opinion, we’re here.”

My job, our job is to take care of our existing clients and If they want to refer somebody that they love, that they care about, then by all means, I’m going to help those people, too. If there’s somebody on the street, who feels like they’re paying a lot of money in fees and aren’t sure what they’re getting for, I’m happy to give them that second opinion.

I believe in my heart that when I do that and when we do what we do for our clients, we are raising the standards for the rest of the industry. It just has to happen. There’s so much opportunity in the financial advice business. That’s all I got.

Gregg: It’s so interesting, because for the first time in my lifetime, when I read the news, not the financial news because I really, frankly, have been avoiding that and just trying to not let it impact my thinking about my own financial situation.

When I read about COVID and I read the stories about people who are hospitalized, who are intubated, who are hospitalized, who are separated from their families, and you’ll see the analogy here, the thing I realize over and over again is that the thing that ends up mattering most to people is that interaction between a nurse or a doctor and the patient, and it matters for both of them.

There’s lots of stories about nurses and doctors, the medical professionals talking about how their lives have been changed like this. There’s lots of stories about patients saying the same thing about the medical professionals, who related to them in a deep, intimate, and meaningful way. Again, it’s so interesting that you began your professional career as an ICU nurse.

Now, you’re a financial advisor. What you’re describing in your relationship with clients and others who just call for a second opinion is that you’re having that same kind of intimate relationship with people that, frankly, is probably much more important than the money itself. You’re actually helping people to find peace of mind during a period of time that is very frightening.

Patti: Yeah, it really is. Everybody’s feeling so vulnerable. I think back to those days, and isn’t it interesting that this virus hits everyone? When you’re a patient in the intensive care unit, nobody cares what anybody does for a living. Who cares who that patient is or what they do for a living? What matters is who they are.

That’s the way I approach what we do here in the financial area as well. I think about a person’s money almost as it’s like this stewardship. You think about your wife who has worked how many years, 30, 40 years, and what you guys have saved represents 40 years of a person’s life, of sacrifice, of traveling, when you maybe didn’t feel like traveling, working maybe when you were sick.

That’s really important. To recognize, appreciate that, and handle that with as much respect, understanding, and appreciation for what it took to get there, and to make sure that it continues to provide for that person and that family what it’s supposed to intend for the rest of their lives. It is that peace of mind.

I would say that there is no more important time in our lives, in a person’s life than to get that from an advisor, whether it be a medical advisor, a financial advisor, etc., is to say, “OK, here is what we need to do. We need to do A, B, and C in order for you to get healthy.”

Same thing here. We need to do A, B, and C to make sure that you are financially healthy for the rest of your life. That’s what it’s all about.

Gregg: Patti, thank you for giving us a reason to celebrate with champagne…

Patti: I want to send you a bottle. If I had time, I would send you the bottle myself, because you have every reason to celebrate, as does everybody who is listening to this broadcast. I believe when we did the last set of broadcasts that we would not go into a depression. I believe that we were going to get out of this.

I did not know that the market would recover as quickly as it is recovering, but I do know that the market and the economy are not the same thing. Do not make financial decisions based on what we think might be happening in the economy. The stocks could care less. They don’t know.

I will end with this one thing, because it’s important for everybody to know this. There was a statistic this morning. You and I both heard it. It’s consumer sentiment. When this stat comes out, it’s actually measured two ways. The government is going to people and they’re asking them, “How do you feel today and how do you feel about the future?”

For the first time, this has been going on since the ‘60s. What’s really interesting about that is this morning, the numbers came in. People are not feeling great today, but they’re feeling much more optimistic about the future. I got to tell you, that is a big deal. There are only four other times when you got those two sentiment numbers that came in that way.

Guess when they were? 1980, basically right after 1987, 2002, and 2009. In all of those periods of time, guess what also happened? It was the beginning of a secular bull market. Now, I’m not saying that’s going to happen. I’m just saying it did happen.

Remember, it’s going to feel awful. You’re going to read terrible headlines. You’re going to watch the news, and it’s going to be bad, bad, bad. Don’t make your financial or your investment decisions based on that. Gregg, how can I thank you enough? Thank you. Thank you. Thank you for taking the time.

Gregg: [laughs]

Patti: What an honor and privilege it is to have Gregg Stebben, just one of the most respected journalists in America, to join us today for us to have this conversation.

I’m just really grateful for the fact that you were able to open up so that people could understand that they’re not alone, that a lot of people are feeling the way they’re probably feeling today, and for us to talk about the ways to get out of this, and that there’s so many reasons to have so much hope.

We’re not only going to get out of this, I believe in my heart that we’re going to be better than ever before. Gregg, thank you for joining us. Thanks to all of you. I’m just so grateful. This seems to be a very popular podcast. Those of you who have been not only listening but you’re sharing it, send this out to the world. Honest to goodness, that’s why we do this.

If you have questions, go to our website, keyfinancialinc.com. You can log on there, ask for a free consultation. I am happy to help you any way I can. Let’s just hit the ground running, focus on solutions. There’s tons of them out there. Thanks again.

Ep45: Economic Outlook with Dr. Quincy Krosby, Chief Market Strategist for Prudential

About This Episode

Dr. Quincy Krosby is not only a Chief Market Strategist for Prudential, she has also served our nation as a US diplomat, worked with the Assistant Secretary of Commerce and the US State Department. With a PhD from the London School of Economics, she is more than qualified to discuss the current economic volatility and how the global central banking systems are reacting to COVID-19. Her expertise gives unique insight to answer Patti’s questions about what is happening in our own country from supply chain disruptions to the high unemployment rate consequences that may or may not stay with us for months to come.


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Hey, whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me today is Dr. Quincy Krosby. This is a real treat for me.

Quincy is the Chief Market Strategist for one of the largest insurance companies in the world, Prudential. It won’t surprise you to know that when you hear her background and hear what she has to say about what’s going on today. First, let me tell you about Quincy. She got her master’s and her doctorate from the London School of Economics.

She served our nation as a US diplomat and had numerous assignments at the IMF, worked with the Assistant Secretary of Commerce and the US Department of State. I got to tell you. I feel like we have our own Madam Secretary right in our own midst.

Dr. Quincy Krosby: [laughs]

Patti: She’s got a PhD in economics. She’s a market strategist just thrown in there for good measure. Quincy, thank you so much for being here today.

Dr. Krosby: Thank you, Patti. We go back a really long time. We thought we saw everything with all of the market crashes for tech, for 2008‑2009. Did we ever think it would be a virus coming after us?

Patti: Absolutely. I got to tell you. It is incredible. Folks, Quincy and I were reminiscing before we got on live. We were going back. It has been 20 years, she and I have been friends. Literally, 20 years ago, she came to Pennsylvania and spoke to a group of my clients. I will tell you that Quincy spoke for over an hour. There were no notes. It was just top of mind. It was amazing.

So much has changed since then. Just to your point, who would have thought that a virus would literally stop us dead in our tracks? Quincy, I’m really going to tap into your brain, that big, beautiful brain of yours.

Let’s break this down for everybody listening today. Sometimes, words get confused. Can you just help us understand what’s the difference between the economy and the market? We talked about them as if they’re one and the same, but they really aren’t, are they?

Dr. Krosby: No, sometimes they do match, but very often they don’t. Let’s look at where we are right now. Where we are right now, we are still in April, the very end of April. May 1st will be this week.

The market is up markedly, so to speak, over 30 percent since the so‑called bottom toward the end of March, right? Yet, Patti, just today and this week, we had the GDP ‑‑ that’s how much the economy grows or doesn’t grow ‑‑ it dropped lower than any other consensus estimates from all the analysts.

Consumer confidence numbers yesterday, the lowest since 2008. Remember how awful that was. Day in and day out, we get just dismal, dismal data, just dismal. Not to mention, we are in the midst of what we call the Earny season.

We always look back, obviously, because we get the numbers. One thing that is happening is that one company after another is just not getting any guidance. They just say, “We can’t give any guidance because we don’t know what’s happening. The uncertainty is too palpable.”

Yet, the market is up. You have to ask yourself why would the market be up despite all of this bad news. It is the market’s way always to look ahead. Formally, we call it that the market discounts all of the information.

Meaning, it takes in the good, the bad, the ugly, and then comes up with an idea of where we might be four to five months from now. That’s the reason.

What the market is saying now could change is, “You know what? The economy is beginning to open, not just here in America but overseas, Germany, Denmark, Norway, Austria. Even the UK will little by little begin to open up their economy. China, the world’s second largest economy and where this began, they’ve opened up their economy,” and we’re doing it here in the United States.

That’s a plus. The market is saying, “OK, even though it will be phased and it will be staggered, it is beginning to open.” Then this is what’s so important is we’re starting to see headlines talking about therapies.

The possibility that if you do go out, you do go back to work, you do get on a plane but you catch this, there’s something that we can take perhaps that will keep us from going into the intensive care unit.

This is crucial because over the next six, seven weeks, as we get into late June, we are going to hear from all of the pharmaceutical companies, the biotechs, the universities that are working on this in conjunction with hospitals, in conjunction with biotech companies, telling us about how their trials – as we call it, their trials – are doing.

You know, the better the information, the better the headline, the market sees through it. Of course, Patti, the ultimate will be when we have a vaccine.

In interview, I heard Bill Gates, because Bill Gates and Melinda Gates have a foundation, and I think putting almost $250 million toward a vaccine, a vaccine that works, that’s effective, and that will be available. There are about 100 sources right now of trying to find a vaccine.

He said in the interview something I think we’re all thinking. “You know, when there actually is a vaccine, that’s when we get back to true normal.”

Patti: That’s interesting, and to your point, we heard this morning that Gilead’s drug, remdesivir, it looks like the trials are looking quite positive. That’s another reason why I think the market’s breathing a sigh of relief.

To your point, you’re right on. I think people just want to know that if they get sick, there is something that would prevent them from getting really deathly ill, and this is a hope.

When you think about the economic fallout, so we think about unemployment, where we’ve got 22 million Americans out of work. You compare that to that US stock market that was just plummeting, and we set records for losses initially. Now it’s going up as if there’s nothing to worry about.

Are there, gouges, anything special that you’re looking to see how this is all unfolding that gives us a hint that this is actually legit? We know that the market has recovered quite a bit. It hasn’t recovered everything. But it can go right back down again, right? Is there something that you think from an economic perspective that you’re looking for?

Dr. Krosby: Yeah. The question for the market is really how long it lasts, the duration of this, because the longer it lasts, the harder it will be to kickstart the economy. The government, the Fed, they’re doing everything in their power financially to cushion the downside, but if it’s longer – and Americans don’t want to get…

We are – the consumer – nearly 70 percent of our, what once was, a $22 trillion economy. The problem is, according to every survey that’s out and the most recent ones, that the majority of Americans say that they’re prepared to remain in a restricted environment until they feel safe to go out, even if it dents the economy even more.

This is, by the way, across all party lines, so if during the course of the next couple of months, you don’t hear from the companies that are working on the therapies, the treatments, it’s going to mean that the economy can’t get moving again the way we want because the consumer…

Remember, the consumer represents – again, 68 percent’s manufacturing – is only about 11 percent, and so this is the issue. Even in manufacturing, which is the area that’s targeted to open first, even in a state like New York State, which still has restrictions in place – it was the leading hot spot in terms of the virus and deaths…

In lifting some of the restrictions, the governor of New York said, “We’ll start with the Upstate Region” – that’s the northern region – “and we’ll start with manufacturing and construction.” Across the country, what you’re seeing is manufacturing, but what happens if workers say, “I don’t feel safe. I’m not going in”? This is a dilemma right now.

The other thing that would be difficult for the market is if we start seeing cases rising, and we always have proxies. Just as the market was getting used to the fact that the Fed was in to underpin every nook and cranny in the market, that the government was providing relief, we also had, for the market, focus on how many cases, and you had a proxy.

One of the proxies was Italy because they were the first European country to be hit so dramatically, lock in, and we would watch every day. “What? Was it case up? Was it the cases down?” and our market reacted accordingly. Then New York became that proxy, by the way, because it got locked down. We would watch to see where the cases went.

What about if the caseloads start to rise and rise dramatically, and we don’t have an available therapy? I think that could knock the socks off of the market, because right now, the market has broadened.

The leadership in the market initially when you talked about coming off of that March 23rd low was the big, big, gigantic technology names. Those are the mega‑caps, and they kept the market up. We call it a narrow market. A healthy market, you want to see more sectors involved.

What’s interesting is that as the states are beginning to lift restrictions, coupled with these positive headlines regarding therapies, potential therapies, we’re starting to see the consumer discretionary names. It’s not the Spam, which they say it tastes good with a fried egg on it, I guess.

Patti: Yeah.

Dr. Krosby: [laughs] You know, Campbell Soup, and not to mention, Clorox, all doing very, very well, but we actually started to see Disney, which has become a bellwether consumer discretionary name. We’re starting to see other parts of the consumer discretionary spectrum gaining as those headlines start to become more definitive as opposed to just mass uncertainty.

Patti: It’s interesting, Quincy, the uncertainty, it’s such a big deal. I was talking with clients this morning, and I thought it was fascinating. Her name was Katy.

Katy said, “You know, if I had known. It’s almost better that I didn’t know that we were going to be cooped up with our kids for seven weeks counting at this point in time.” She said, “That would have really bummed me out.”

The other thing that she said that I thought was fascinating – and it’s one person, but I’m hearing it more and more – people are just dying to get out. What she said was, “I can’t wait to go back to the mall. I want to go to Target. I want to go shopping. I want to be able to buy stuff, like, this is getting really, really old.”

I just can’t help but wonder if there are a lot of people who are feeling that, and whether that kind of unmet demand, that there’s a lot of demand that once we’re able to get out, that’s going to spring forth and help the economy, hopefully.

Dr. Krosby: I think it absolutely will help the economy, and that’s one of the reasons that the government has been so generous with the unemployment insurance. I never thought in my wildest dreams – and I don’t think you…

Patti: Yeah.

Dr. Krosby: ..either, Patti, that you would see in the category of who’s going to get unemployment insurance, you would see gig workers, G‑I‑G. Did you ever think that that would be included?

Patti: No.

Dr. Krosby: It’s clear, they want folks to be able to come out and start spending. Look, all over the world, people want to get out. We’re seeing demonstrations everywhere. “Lift the lockdown, lift the lockdown,” but the goal is to do it safely.

Again, the main reason is they don’t want to see those cases come back, because if they do, if we get a significant second wave, is what they call them, without some kind of realistic therapy that’s available, that’s effective, guess what? There’s going to be another shutdown, and that would be really negative.

If you think this one is bad, imagine another one where they then say it’s got to be longer than the first one because we want to make sure that when we lift it, it’s over.

That’s the problem with this, and it’s humbling, Patti. It’s humbling for all of us. It’s a virus. It’s us against this virus. Will we win? Absolutely, we will win. Do you remember the Hong Kong flu?

Patti: Oh, yeah, absolutely.

Dr. Krosby: Do you remember how many deaths? The death toll? It was dramatic. I remember it. I remember being so sick. I had forgotten there was no vaccine, and the death toll was tremendous, but look. Look where we are, how many years later.

We will get through this. There will be a vaccine, and they are working. It’s sort of like it’s become a pandemic, if you will, of every genius, every scientist, every doctor working toward that vaccine. It’s amazing, and we will get one, and it will be effective. The question is, what’s the devastation before that?

One other thing is think of the timing. Everyone, the first days of spring, every guy was out there on his motorbike, motorcycle. I kept looking to see if they had the – what do you call it – the mask on.

Patti: Yeah, the face mask, right.

Dr. Krosby: The face masks, because they don’t even want to wear the helmets, so how are they going to wear the face masks?

Patti: Exactly.

Dr. Krosby: Everyone feels that way, and you see it. People are on the beaches. People are in the parks. This is normal, but we’re not living in a normal world, and that’s the problem.

Patti: It just goes to show you, the human nature, human nature, and we as people, we need other people. Digital is fine to a point, but there’s just nothing like that face to face.

I think that the government response has been…I have to tell you, I’m going to use a word that might surprise you, Quincy. It’s kind of impressive how quickly they moved and how dramatic it has been, and the fact that they did it almost, as you pointed out, indiscriminately, I found it…

I don’t know if you saw that interview with Neil Carrey on “60 Minutes,” but he said when we look back to the financial crisis, we learned a lot. He said the reason that it took so long for the economy to come out was that we were too tentative.

What we should have done, and what we’re learning now is that rather than doing these targeted programs to really make sure that we’re just helping the people who really need it, when you’re going through something like this, we can’t fool around here.

We’ve got to help both the undeserving and the deserving. In an imperfect situation where we have imperfect information, we’ve just got to make imperfect decisions. In the end, because of the way the economy works – and this is just me talking. Tell me if I’m on the right track or not.

In a situation such as we’re in, getting money into the hands of people gives them a feeling. It’s kind of like that wealth effect. It’s kind of like that, “OK, we’re going to get through this. I do happen to have this unemployment check that happens to have another $600 in it. I’m going to be OK.”

I think that that’s going to translate when we’re able to get out and get back into a semi‑normal life, into hopefully, people are going to use that money and be able to go back to life. Maybe not right away, but eventually.

Dr. Krosby: No, I agree with you, and what I found interesting was when you go back to 2008 and 2009, remember that Ben Bernanke, who was head of the Fed then, was an expert on the Great Depression. He then looked at what they did and what they didn’t do and why.

The Great Depression, by the way, lasted 12 years. Most people don’t realize that. When he was asked, what was the worst mistake the Fed ever made – it had been at the 100th anniversary of the Fed – he said it was what the Fed did in 1937. That was when they raised rates. They told the banks, “Hold more of that cash. Don’t lend it out, because after all, we’re worried about inflation.”

He said that was the worst mistake. Then the Fed raised rates. If you noticed, Ben Bernanke learned from that, because he didn’t want to raise rates initially. He though he needed to see the economy have a viable recovery.

This time around, as you point out, it was the cavalry coming out. There was the President’s nemesis, Jerome Powell, coming out and leading into every nook and cranny. The Fed’s balance sheet has gone from $4.5 trillion to $6.6 trillion right now, and the expectations are it’ll probably go up to about – I don’t know – $8 or $9 trillion by the time they’re finished.

The deficit is going to rise dramatically because the government’s view is – the President’s view is – we have to do whatever we have to do. The economy must be cushioned as much as possible. Patti, there is a lot of criticism regarding the deficit and regarding what the Fed is doing.

There’s a lot of criticism, but you know, I go back to talking about the interview on 60 Minutes. You don’t sit here and write a white paper about this. You don’t sit here and argue and debate the pros and the cons. It’s triage. It’s financial triage is what it is, and you just do what you have to do at that time.

I’m amazed. People are saying, “What is this going to lead to?” Well, we all know, unless the economy skyrockets, we’re going to have to pay for this, but would you rather have the economy collapse and so damaged that we never get back on our feet? That’s not a correct answer for anyone, and yet you’ll hear that in the chorus of criticism.

Patti: It’s interesting, because I think back to just a few years ago. Everyone was kind of freaking out about the rising deficits and the amount of US government debt, and, “What are we saddling our children with?”

Here we are today, and it’s like, “Pile it on. We’ll do whatever it takes.” That’s what they need to do. That’s what the government is there for. Nobody knows the right answer. That’s what makes all of this so uncomfortable, and why markets are plummeted and things of that nature.

Yeah, we will have to pay for this. With that in mind, let’s talk about the federal government. We can talk about the Fed in a second.

Given the amount of liquidity and amount of stimulus or relief – it’s probably not stimulus – are rising taxes inevitable? Really, Quincy, how does a government pay for all this kind of stuff?

Dr. Krosby: You either have the economy coming back gangbusters – but no one expects that – because then you would have the tax receipts from that. Just take a look at local. Local economy at state level, local level. The Fed is getting involved in that now, setting up a facility to help on the most granular level in our country. It’s going to have to be taxes.

It’s going to have to be taxes, and I think it’s something we all have to accept, and I think it’s regardless of who is in the White House. The taxes are coming. You have to pay for it. If we don’t allow it to be paid down, you only have to then say, “What does that mean down the road? That you get the Fed to pay for this always and let their balance sheet go up, up, up?”

There was a debate as we were going through the primaries whether the progressives on the Democratic side, if they were to win, you would have something called modern monetary theory where you raise the deficit so dramatically because what you want is all of those plans that you have to pay for everything to take place, because their view is that would ultimately help the economy.

But the way that they said it would in essence early on be paid for and not have interest rates rise dramatically was have the Fed buy the bonds. In many ways, that’s exactly what you have now, but not for the same reasons. That’s what’s so interesting about it.

Patti: Yeah.

Dr. Krosby: Right? It’s interesting because you think about this. Think about if our deficit rose and rose and rose, and at auctions – that’s how we pay our debt, right? We sell our bonds. Supposing buyers said, “You know what? Two percent on the 10‑year Treasury, it’s just…No. You’ve got to give us four percent, America.”

Imagine if it kept rising and rising, and that would kill the economy, obviously. You’ve got the Fed now engaged in, in many ways, what the left wing of the Democratic party had been talking about, this modern monetary theory.

However, in a world in which you’re going to have to deal with this, I think the expectations are that at some point when the economy is healthy, the Fed dials down its help and will do what the previous Fed did and what Powell was trying to do, and that is lower the balance sheet.

Bring the balance sheet down to where it’s commensurate with where the economy is. This gets really theoretical and so on, but it’s got to be paid for, and my view is it’s going to happen regardless of who’s in the White House come next year.

Patti: Let’s talk about that a little bit further on a fundamental basis. The Federal Reserve is basically buying the debt, right? That’s what they’re doing right now.

Dr. Krosby: They’re the buyer of last resort, right.

Patti: What happens is, they’ve got the cash. They’re printing the cash down in their basement. They’re printing money on their little printing machines, and they’re using that money that they’ve just printed to buy the bonds of the US Treasury, right?

Now they have all of these bonds, and they might be getting their measly one or two percent interest rate. At what point does it become a problem for the Fed to hold all this stuff? Again, I’m asking the question that maybe some listeners are wondering. Could the Fed get into trouble? They can’t exactly raise taxes. That’s not an option.

Dr. Krosby: No, and this is why you hear a lot of people asking, “Are we going to have hyperinflation? Is now a good time to buy gold?” What’s interesting ‑‑ and you will hear it all the time ‑‑ gold has many narratives. Inflation is one of them.

Going back to Ben Bernanke ‑‑ because we always have to go back to something we know, right? We know what happened.

Patti: Sure.

Dr. Krosby: The Fed’s balance sheet was $850 billion in December of 2008. That is when we noticed that the Fed was buying bonds, and then it became clear when we got into 2009, they were doing what’s called quantitative easing, buying the bonds in order to push the rates down to help the economy.

When you typed into Google “quantitative easing,” and you’re like, “What the heck is that?” Now we know what it is, but what is that?

What would pop up – and this would be late 2008, 2009 – would be printing of money, which is the pejorative. You’re saying, “Oh, for God’s sakes, what on Earth are they doing? They’re printing money. This is not good.” Then, what would happen when you clicked there, it would be Germany in the 1920s, and then hyperinflation.

The Central Bank of Germany, in the 1920s, printed money, handed it out, and then wages went up, prices went up, but then it escalated. You had Germans buying a loaf of bread with baskets of money. That was hyperinflation, and then gold was considered what you needed in a hyperinflationary environment.

If you remember – and I remember this so well, because I would be up late at night, like 2:00 or 3:00 in the morning during that period just trying to figure out what’s going, what’s going to happen the next day. I’d turn on the TV, and there would be these ads for gold bars. “Buy these bars of gold.”

We live on an old farm, and I was thinking I could buy the bars of gold, and I could put them near the barn, do a map for the kids, because it becomes intriguing.

If you remember, that was what we were buying before we went into stocks. The gold trade, and then ultimately silver, was killed with margin calls. Ben Bernanke introduced zero interest rate policy, and that was meant to push us into taking on risk with the stock market.

Right now there is almost a resurrection of that fear that this is going to lead to hyperinflation, and the irony of this whole thing is the Fed is fighting deflation. That’s ironic, because the only thing we could do is look at the numbers that we get. Prices are down across the board, maybe not for a living, but…

Patti: Sure.

Dr. Krosby: …sending kids to university or whatever. What you have is the Fed – and all central banks, by the way – fighting a fear of deflation. That’s why they believe that they can react quickly enough if they do see a major inflation starting to take hold.

Right now, their goal, at least in the US, is just to try to get inflation to two percent and be maybe what we call “a little hotter.” Let it go a little bit higher than that in order to make absolutely certain that it is intact.

The reason for this is because a lot of people say, “Well, it’s kind of good not to have any inflation,” but you know what? When you have some inflation, it lets companies raise their prices. It lets them raise wages.

It also, by the way, if they can raise the prices, it tends to allow them to keep workers in, because if you get rid of workers, guess what never changes? Your debt. Your debt stays exactly the same. You don’t have a job…

Patti: Interesting.

Dr. Krosby: …hours are cut. You know what? Look, this is not easy, because I’m not in that camp. Despite having a doctorate in economics, it’s as much an art form as it is a science, and you know what they say, Patti. That God put PhD economists on this earth to make the weathermen look accurate.

Patti: There you go, absolutely, and you know what? It is an art form, and if you knew exactly what was going to happen, then none of this stuff would be going on. We could anticipate it. Wouldn’t it be wonderful, Quincy, to fast‑forward five years from now and know how this thing already played out?

Dr. Krosby: [laughs] Yeah.

Patti: To your point, we kind of have the benefit that Bernanke didn’t have in that Jerome Powell really saw what he did and made a decision. It didn’t lead to the rampant inflation that everybody talked about back then, and it took a little bit longer.

Rather than do the 1Z, 2Z, QE1, QE2, we’re just going to do it all at once and do the firehose, and really put a lot of liquidity on this thing to see if we can get us out of this as quickly as possible. Here’s a question I have for you, because we’re talking a lot about the United States.

When you think about – and I don’t know if you can help me out with this – but I’m really curious what the other nations do, like a Germany or a Japan or even China. Are they doing that firehose thing, too, whether it be their central banks or their governments in terms of fiscal relief, the equivalent of our unemployment insurance, etc.?

Dr. Krosby: Yeah, they are. Nothing to the extent of the United States to say that. Globally, what you have is on the monetary side, which is what a central bank does, all of the central banks around the world acting quickly. The Chinese Central Bank has been trying for a long time.

Even before this their economy was slowing, then they had the trade war with the US, and then the virus of course starting there. They have been I wouldn’t say going insane throwing things at the economy, but more and more we’re seeing a monetary policy meaning lowering rates, telling the banks to lend money, don’t keep so much on the balance sheet.

Now we’re starting to see of some infrastructure spending. The one thing in China, which is incredibly important for their stability, is to make sure that employment stays intact, because without that everyone says President Xi if China is in there for life.

Even in countries like that, you can have so much rebellion, if it ever led to that, where the party leadership actually says, “We need a change.” Employment is crucial for them.

Germany, which by the way they do not like to have deficit spending, that is anathema to them, but even there in 2008‑2009 as well, we saw that they were prepared to do targeted spending. The European Central Bank, because there’s so many countries involved, are working towards some kind of a liquidity pump into the system.

We’ll hear probably more of that next week and the week after, but they’ve already started. They have negative interest rates. That’s something that everybody wonders, “Are we going to have that as well?” and then Japan, the other day, the Bank of Japan going all in.

Most people don’t realize that quantitative easing takes on many forms depending where you are. Besides “printing money, keeping their rates low,” they also buy ETFs, but now they are pushing in even more. The longer this goes on, the more you are going to see in every country.

Patti: That’s interesting. When you think about it, how do you measure the stimulus and the relief and what the Fed is doing? Do you do it as a percentage of GDP, and is that why ours is much more massive because our economy is so much bigger?

Then, as a spinoff question, depending on what your answer is to that, since we’re doing so much, does that mean that after 2008 and 2009, where we came out of it but international countries overseas did not, it was theirs was much slower? Is that another repeat of all of that do you think?

Dr. Krosby: Yeah, it is. Patti, do you remember the summer, it was the London Olympics and Mario Draghi, who then was the Head of the European Central Bank, who had problems with Spain, with Italy, with Greece? I think it was 2012, if I’m not mistaken, and here in the US you could have had a portfolio just focused on the US, completely domestically focused companies.

Yet, we were in a stranglehold because of what was going on over there. He made a comment. He said, “You know, we will do whatever it takes, and believe me, we have more.” Just by saying that, he didn’t even have to do anything, the markets took a big sigh of relief and basically opened up.

The point is when you look over there, you see the problem, and the problems were smoothed over as the global economy came back to life, albeit there was much slower, but they have those problems today, and in Italy in particular. We always look at – and I don’t want to get too technical – we look at the bonds, at sovereign debt like our treasuries.

We look there and we see what the yields on it is. You’ve got people who were saying, “Do we need this? Do we need…maybe we should just leave. Maybe we should finally just leave the European Union,” which then creates its own cycle of fear of destabilization. You remember when even the British, the UK, left the EU. They weren’t even member.

They were not members of the Eurozone, by the way, they had their own currency. You remember in the beginning it caused chaos, chaos. This is part of the problem, and they’re under a tremendous strain and test in the Eurozone to see if this could work. It’s one thing to work when everybody’s happy and everything is good. Could it work in a situation like this? We’re going to find out.

Patti: Boy, we sure are. When you think about that, “we’re going to find out,” when you think about all of the things that we’re doing, how does this compare to other crises? In terms of the amount, the trillions and trillions of dollars that we’re doing here in the US, how does this compare on a percentage basis?

Is it equal to the financial crisis or the tech bubble, or even if we go back further, Quincy, like wartime or even the Depression, is what we’re doing now eventually when with World War II and the amount of spending that was done to help with the war, is this the equivalent or maybe even more?

Dr. Krosby: It’s so difficult. The Great Depression did last 12 years. When I mentioned 1937, that’s when they started in essence creating the income tax. They created it early, but they raised the income tax to pay for the war every day.

The President Franklin Delano Roosevelt tried everything. I hate to say what we call it, it’s throwing spaghetti at the wall and hoping something sticks. That’s the way we discuss it. At least he was prepared to try everything. This time around – we always have to remember something, this was a government‑induced shutdown.

The government knew what it was doing and why, as opposed to events hitting us and everything going willy‑nilly. It was a good thing that we came into this. As the Chairman of the Federal Reserve characterized the US economy just eight weeks ago, we were in a good place.

We were in a good place in terms of the housing market, in terms of employment, in terms of every metric the economy was in a good place and so were interest rates, they were still low. That helped. Imagine going into this if we had been in terrible shape. That would have made us even worse.

That’s why I think that the market – just going back to what you said initially – the economy and the market, how could it be so different now? The point is it’s the market’s way of looking ahead and saying, “OK. We see that things are bad, but what we’re interested in, and this is investors in all over the world saying, ‘Let’s see what it looks like on the other side, and how soon can we get to the other side.’”

No one is expecting it to be the way it was coming into this. We will not be in a good place. The thing is we just need to be where we’re coming out of it, where the data are getting less bad, where they’re fewer people going in for unemployment insurance, where the GDP number, which was so horrible today, maybe is still bad but gets a little bit better.

That’s the part of the healing that tells you that ultimately we’re going to be getting out of it. You go back to something about this country. Why is it that after the financial crisis our country was stronger than all of the other countries? There’s something special about our country. It happens all the time. I remember back then in 2009, 2010, they were saying, “Oh go buy overseas. Go to this country.”

You know what, even if you never, ever took advantage of attractive valuations in emerging markets and in Europe, you would have done really well just being here in the US and the reason is, I think we have a system, nothing is perfect, but we have a system in which companies are managed. They can do what’s necessary, and they still have that entrepreneurial spirit, which a lot of countries don’t have.

I’ve worked all over the world, and always coming back home, seeing this entrepreneurial mentality in America, and I’m not here as part of the Chamber of Commerce.

Patti: Right, right. [laughs]

Dr. Krosby: But I always just look at our companies, and what they do, and the leadership that comes out of that in terms of which company leaves the best debris. Most of them are American.

Patti: It is so interesting, and it’s that spirit. It is that energy, it is that one way or the other we’re going to get out of this.

Dr. Krosby: Yeah.

Patti: I think that is so important, because so much of this is psychology, right. Leadership is basically influencing other people with integrity, and moving them in a direction that you believe is the right direction. You’re not going to sit and just stew. We’re not going to circle the drain here. Let’s do something.

I do think that that is something that is unique, or put it this way, it’s something that is part of our culture. It’s part of our society, and I do think that that is what will help us. People are working all over the world trying to solve this problem, but I think that it is something where the American spirit is going to come out of this, and probably stronger than ever.

I think that the other thing that we want to think about, and I would be interested is, as we think about the United States versus other countries and are manufacturing and the things that we are learning about supply chain.

Do you think like we think about the medicines that are made in China, and the fact that they could really hold out on us, and say, “Well, we’re not going to get, we’re not going to send that stuff to you.” Like is that something that we should be thinking about?

Dr. Krosby: Well, I’ll tell you something else. This may surprise you, but you notice how you can’t get the disinfectants? I always say, “I’ll know when this is over, when I could go to the supermarket at 3:00 in the afternoon and find Clorox wipes on the shelves…

Patti: Right.

Dr. Krosby: …and no one’s fighting for them and they’re there. You’ll know that that hoarding is over. Everyone’s comfortable again. Well, what’s interesting is that in those disinfectants many of the chemicals come out of China, and the Chinese…

Patti: Oh.

Dr. Krosby: Yes, yes. The Chinese are actually having trouble getting back to production on it, and that’s one of the reasons you don’t see the shelves being replenished, even to get into the granular on this, but even toilet paper it seems to be coming back onto the shelves. About the drugs, yeah, the compounds for the drugs come from China. They come from India.

I do think that the supply chains even for the manufacturing companies. I think you’re going to start to see them come back to the US, and with that we’ll start to see manufacturing, which by the way and this is the saddest part, manufacturing had started to come back up. When we look at the numbers, there’s a line. It’s 50, right.

Below 50 is contraction, above 50 is expansion. We started to see manufacturing the Philadelphia fed story which is the manufacturing report in the Philadelphia, greater Philadelphia, Pennsylvania area, starting to go so strong. Only the last report, obviously, came down dramatically. We were in that direction.

There was a manufacturing renaissance beginning in our country, and the hope is, the hope is that we’ve learned a lesson, and we start to come back. It’s going to be a little bit difficult, and it will be more expensive. After all, the reason they went out of the US was to save money.

Patti: Right.

Dr. Krosby: Well, look at how that help them now. I think then that will start to help create that middle class again that felt disenfranchised as the supply chains just left the US, went outside of the US for so many years. It may be painful in the beginning, as you break supply chains, only to start new ones.

I think that’s coming, and I think it has a bipartisan support, because if you remember, when Elizabeth Warren was running for president, her message was not dissimilar from President Trump’s message. She would say the same thing, “I want jobs here in America. I want Americans to be doing these jobs, and earning a decent wage.”

I think that is going to come, and I think that’s important, and it’ll be a secular change in our economy, just like a secular change in our economy was, and, unfortunately, there’s a problem today with it, is in the energy industry.

Patti: Yep.

Dr. Krosby: You know where we are, energy independent. When did you ever think we would be energy independent?

Patti: Exactly. Isn’t that interesting? What a great observation that that’s going to be, that could be a secular change.

Dr. Krosby: Yes.

Patti: I think you’re right. I think that the fallout from all of this, as painful as it is, is going to be at a secular, meaning a longer‑term, more permanent change in the way that we do things.

Dr. Krosby: Yes.

Patti: I’m all about the hope, Quincy. I really am, and I think about all of the people that are listening today, that may be unemployed. To be able to say to them, “There really is hope. There are going to be jobs that are going to come back, and there are going to be things that you’re going to be able to earn or jobs where you’re going to be able to earn a decent living, and be able to raise your family, and have all of the things that you want.”

It’s going to take some time but it’s going to come.

Dr. Krosby: Amen. I’m not here to sugarcoat the situation, but the bad times create a positive move for countries, and this is one of them. I think this particular problem that we had is going to have companies reevaluate, and say, “You know what. I’m coming back.” It started. As I said, it started. It actually had begun, and now we had this major dislocation.

Patti: And because of the dislocation, I can’t help but wonder if that’s not just going to accelerate the process.

Dr. Krosby: Yeah.

Patti: It’s easy to kind of keep on doing everything that you’ve always done. Inertia is also part of human nature, and these companies were making money, and they were growing. Everything was hunky dory, but in a way, a crisis like this, even in my own small business, it has made me kind of sit back and say, “Is this the way that we should continue to do things? Is there a better, faster…”

Everything that we do, just take a look at it and say, “How can we do things differently?” We’re already starting it, and guess what, it’s already working. Now, small companies are smaller, and therefore we can move faster. Bigger companies, it’ll take some time, but I think that there’s a lot that we’re going to learn from this. I think that a lot of good is going to come out of a very difficult situation.

Dr. Krosby: Yeah, no. I absolutely agree with you, and by the way, I just want to point something out. We go back a number of years now. We started to see companies actually leave China or cut their presence in China, and perhaps move to another country. So we would call it China plus one, China plus two.

But then, we started to see them come back onto the US [inaudible 49:43] and when asked about why, they just said, “There were too many problems. It got to be actually too expensive, when we started, and the transport, and problems. Then it was just easier to come back to the US.” That was what we called the beginning of a renaissance, was manufacturing.

Patti: Wow.

Dr. Krosby: Yeah, yeah, yeah.

Patti: Oh, Quincy, I can’t thank you enough for being with all of us today. It has been such an honor. I got to tell you what an honor it has been to have Dr. Quincy Krosby on our podcast. You’re just so smart. I think we could talk all day long. So thank you so much for joining us.

Dr. Krosby: Patti, thank you so much, and you know one thing, when I did join you, and it wasn’t that many years ago, after our initial meeting, but I just remember talking to your clients, and how lucky they are, and they said it, that they were so grateful to you because, I think it was after the 2008, 2009, a few years after that.

They all said you made them whole again, and you took care of them. That’s what we all need. I mean just talk about things that are changing, pensions. Where are pensions? We don’t get them. They depend on you, Patti, and you have served them. I just remember there was a line at the ladies room at the restaurant that we were in.

This was not the one, 20 years ago, OK. They were, yeah, they were telling me about how you got them through that horrible period in 2008, 2009. So this was a few years after that when I was there with Jason. So they’re lucky. They’re very fortunate…

Patti: Thank you.

Dr. Krosby: Yeah, yeah…Thank you.

Patti: It is having wonderful people like you and access to that incredible, beautiful brain of yours, as I said earlier and the intellectual capital that you represent. It helps us to do a great job. Hopefully, we are going to get out of this. Thank you for your support. Thank you for the phone calls and everything that you do at Prudential and for all of us.

By the way, while we’re doing this, I just want to thank all of you who are joining us today and listening to Quincy and I. These are really tough times. There’s so much information out there.

I can’t thank you enough for including us as part of your day and allowing us to make a little bit of sense out of what’s happening in the world around us. We have hope. There’s so much to be hopeful about.

We’re going to get through this thanks to people like Quincy Krosby. Just know that we’re here. If you have any questions, don’t hesitate to call us. We’re here for you. You can visit our website at keyfinancialinc.com.

In the meantime, stay safe and healthy, and just know that we’re going to be better than ever after all of this. Have a great day.

Ep44: Candid Conversation with Alex Dryden, Global Market Strategist, at JP Morgan

About This Episode

In today’s episode, I have a most thought-provoking conversation with Alex Dryden who is a Global Market Strategist with JP Morgan. Alex shares his expertise and insight in explaining what he believes is happening right now in the markets that will undoubtedly affect not only future market activity, but future investor and consumer behavior as well. This is a climate of global economic change and uncertainty, but there are certain strategies that financial advisors should be taking on behalf of their clients right now to help protect and grow portfolios. Listen now to make sure you are on the right path to navigate these tumultuous times!


Patti Brennan: Hi, everyone. Welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Hey, everybody, let’s face it. This is a strange time right now.

We’re all feeling this ambiguous grief. We’re stuck in our homes, separated from others, and trying to fill the emptiness with things that give our lives meaning and joy. Before we even start, as you do, I just want to say thank you for including me in your day. I hope that you find that our time together gives you some practical understanding of what’s happening, and more importantly, some hope.

I have to tell you, I am really, really excited to have our special guest today. He is Alex Dryden, global market strategist at J.P. Morgan. He’s a frequent contributor on CNBC, and Bloomberg, and everything else in between. Alex holds degrees in international business, finance, and economics from the University of Manchester. Alex, welcome to the show.

Alex Dryden: Thank you very much for having me, Patti.

Patti: Now, here’s a deal, Alex. Before we get into the meat of this, many of my listeners already know this, but I want you to know that in my previous life, I used to be a nurse. I was an intensive care nurse. I want you to know Alex, the only reason I’m bringing that up is that I spent a semester in Manchester, England learning midwifery.

Now, I would imagine that it’s probably changed a lot since then. I would never trade that opportunity to learn about the healthcare system over there, socialized medicine, and how care is, or at least I should say was delivered back then.

Alex: I imagine it’s changed a little bit since then.

Patti: Just a bit. By the way, where are you right now? I think that you’re based in America. Where are you calling in from right now?

Alex: You’re right. I’m normally based in New York, but I was over in Europe for vacation when the travel ban came into effect. My visa gets me out of the United States but doesn’t get me back in. I’m currently camped out in London, waiting for the travel ban and the virus to disappear. Could be a while.

Patti: Wow. Is your family with you?

Alex: Yeah. They’re over here as well.

Patti: That’s good.

Alex: There’s definitely worse places to be quarantine than London, UK.

Patti: That’s terrific. Good for you. That’s terrific. Let’s talk a little bit about what’s going on. Really, I want to pick your brain in terms of what we should be thinking of in terms of our portfolios.

Alex, diversified investors have been waiting a full decade for interest rates to rise, small caps to outperform large caps, and international stocks outperform the US. Especially now, is there an argument to be made that none of these things are going to happen anytime soon? What do you think?

Alex: Good question. I think it’s a great place to start the broader discussion. Let’s maybe unpick some of those different areas. Firstly, with interest rates, I think investors need to get themselves into the mindset that we are certainly in a lower, even longer environment. If we go back a few years, the Federal Reserve were gradually moving rates higher.

We started to approach a level where interest rates in the United States at least, were starting to look a little bit higher than they had done post the financial crisis. That’s immediately been reversed as the virus has hit. The Federal Reserve have cut rates dramatically. Then they’ve also flooded the market with additional monetary policy support that has driven rates even lower.

We’re probably going to be living with the effects of this monetary policy response to the coronavirus for some time to come. I think investors need to get used to having lower for longer when it comes to interest rates.

You also talked a little bit about the small caps and their tendency to outperform large. I think that again will be a common part of the next expansion, is looking for better growth opportunities in some of those small‑cap names, I definitely think that will be part of the growth picture.

Finally, talking a little bit about where geographically should investors be looking. For much of the last cycle, the United States market completely outperformed much of the international environment. It’s important that clients understand why that dynamic was in place. For much of the last 12 years, we’ve seen the dollar rising versus many currencies around the world.

Whilst that’s great for any Americans traveling overseas, it’s a little bit challenging when you’re putting your money to work in a foreign currency, to have the dollar rising like that. Now, we actually think that over the next few years, the dollar will begin to weaken.

As the dollar goes from being your foe to being your friend, as an investor, we’re actually starting to think that maybe international equities will do a little bit better. We’ve got to be careful. Not all international markets were born equal. One area in particular that we think will outperform and do much better is emerging markets, particularly in the Asia‑Pacific region.

They have some really favorable demographics, a really powerful emerging consumer. As the dollar changes direction, we think they could do really well. I definitely don’t think that these trends that have been in place for a while, not all of them are going to stay put over the next few years.

Patti: I’m curious. What do you think would make the dollar weaken? Is it because of the amount of stimulus the Federal Reserve has put into the system? What’s the dynamic that goes on to make that occur?

Alex: You’re completely correct looking at the central bank. What we’ve seen happen over the last 10 years has been that the US economy has been growing quite quickly, especially relative to their peers overseas. Much faster than growth than we’ve seen in, say, Europe, the UK or many other developed markets.

When you’re the only game in town from a growth perspective, what that means is that your currency becomes more valuable. As it enhanced further, as the Federal Reserve have been the only central bank for the last few years that have really been able to get on and raise interest rates. What that does is it attracts capital into the United State and people start to purchase the US dollar.

The reason being is that if the Federal Reserve are the ones raising rate, that’s quite attractive for overseas investors and savers. If you go to somewhere like Europe or Japan, many of those central banks have close to zero or even negative interest rates. That’s really damaging if you’re a long term saver.

What a lot of European and Japanese investors have been doing has been moving into the United States, looking for a better rate to savings. That has pushed up the value of the dollar for the last few years, but in recent weeks, we’ve seen that relationship completely reverse because the Federal Reserve have taken rates all the way back down to zero.

What that will likely mean is that international investors who are currently camped out in the United States are probably going to say, “Well, actually, maybe it’s easier for me to go home because the benefits of me holding US‑based assets isn’t quite as useful as what it used to be.”

As they start to sell US Dollars and go back to where they came from, that should start to weaken the dollar gradually over the next few years. We do think that’s definitely a trend that will play out over the coming years ahead.

Patti: That is so interesting. It does. It makes so much sense, Alex. It really does make a good case for including the international equities and even international bonds in a diversified portfolio. Nobody knows what’s going to happen in the future, but we’ve got to take all of that into consideration and not necessarily rely on the last decade in terms of making decisions going forward.

With that in mind, what are your thoughts about index funds versus active management? Most of the index funds, for those of you who are listening, really focus on how big a company is. That’s called market cap weighted, versus active management where you have a money manager that is actually doing the stock picking.

Yet, when we look historically, again, the average fund manager hasn’t outperformed their index. Well, I’ll give you my thoughts after you answer, Alex. Just on the face of things, how can active management compete with the effect of large companies just getting larger?

Alex: Good question. Let’s just take a step back and consider active versus passive. The financial industry as a whole tends to divide themselves into two camps. They’re either all in on passive or they’re all in on active. We need to acknowledge it. There’s a time and a place for active management, and then there’s a time and a place for passive.

During, for example, boom years where the market is moving up quite considerably, that’s a great time for passive management in many different asset classes. We need to acknowledge not every asset class is amazingly useful when deploying active management. Sometimes, there’s a time to be passive. Sometimes, there’s a time to be active.

For example, in the US markets when things are looking good, then passive can tend to outperform, and the low fee are attractive. During periods of volatility, here is when there is dislocations in the market, such as what we’re experiencing at the moment. Having an experienced manager at the helm who can make sophisticated decisions, that can be helpful for managing the risk within the portfolio.

That’s when I tend to think about active, at least within the United States. Now, don’t get me wrong, as we start to venture away from the US equity market, I tend to favor active over passive. The reason being is that, as you go into the international markets, the benchmarks that you’re attaching yourself to and what you’re actually getting exposure to in your portfolios isn’t always amazingly great opportunities.

For example, in somewhere like Europe, some of the biggest sectors, it’s the banking sector. Now, we don’t really worry about the European banking sector like we did back in, say, 2012 and 2013, during the Eurozone Debt Crisis. It’s not the most profitable or exciting opportunity within the European market.

Therefore, we want to think that maybe that’s a good space to deploy some active management. The same is true within emerging markets as well. Again, the benchmarks aren’t amazingly constructive, and therefore active managers can dig around and find the best opportunities within the EM universe that may not have huge amounts of waiting within a passive benchmark.

That story becomes even more true if we step away from equity and into fixed income. That is really an opportunity where active managers can use some opportunity in their stance to be able to jump in and out of the most exciting names within the fixed income world. For me, when it comes to this active versus passive discussion, there’s a time and a place for both.

Investors need to be cautious during this risky, volatile period about just going along with the ride for passive management. For me, think about it carefully. Think about the opportunities for the long term, try and work out what suits you in your risk portfolios.

Patti: Alex, I couldn’t agree with you more. I didn’t want to tell you what I thought, but especially right now, as we look at some of the managers and some of the things that you guys are doing, it’s been really impressive. I think about also like the small cap area we talked about before.

A lot of people don’t realize that the Russell, the index for small cap stocks, even before all of this happened, 40 percent of the Russell Index, they had negative earnings. If you’re buying the index, you’re also buying companies that aren’t making any money.

I’ve always believed that just because I, Patti Brennan, who stands 5’3” can’t dunk a basketball, or that the average person can’t dunk a basketball, it doesn’t mean that anyone can’t dunk a basketball. I do believe there are people out there with access to CEOs, balance sheets, and really have a better understanding of a particular company or an industry. That can add some value.

You talked about fixed income, because I agree 150 percent in terms of how to manage a fixed income portfolio. Getting back to what we were talking about as we first started, with interest rates this low, and with companies that are struggling, states and municipalities who are probably not going to be able to balance their budget, how should we think of bonds in a diversified portfolio?

Alex: This is certainly a head‑scratcher. It’s one of the really big challenges, not just for the last few years, but it will be a big feature during the next expansion, especially now that many of the central banks around the world have cut rates even further. They’ve dragged down the yields of bonds.

Now, if you go back a couple of decades, government bonds really used to be this perfect asset class, where we could go to it not just for income and yield, but we could also go there to look for safety and diversification. It’s this perfect mixture of the two.

What we’ve seen happen since the financial crisis, and the unorthodox policies that many central banks have adopted, what they’ve essentially done is broken the bond market in two. They’ve forced investors to choose. You can hold government bonds if you like, and that provides you with diversification benefits, but the yield is very, very low.

Therefore, it’s unlikely to meet many clients’ income needs. Therefore, they’re forced to go elsewhere for income. We’ve now broken the bond market into two parts, income‑orientated asset classes that come with higher risks, or safer, more secure government bonds, but they come with much lower yields. What are investors meant to do about this?

Again, what we need to think about is careful financial planning when it comes to managing this particular challenge. What we need to be able to do is hold part of our fixed-income exposure in those secure assets that provide some diversification, some insurance against volatility elsewhere in our clients’ portfolios on one hand.

Then we need to carefully go about finding income opportunities elsewhere. Now, using that balanced approach between the two, we can try and solve for this problem. Let’s be clear, Patti, this isn’t as easy as what it used to be. The central banks have really made it challenging.

I urge investors to seek out professional help in order to try and navigate this particularly challenging problem. It’s only going to get worse during the next few years.

Patti: Wow. Alex, you are singing my song on that one. It ultimately comes down to the financial planning and to see how all of the asset classes can work together in such a way so that the portfolio itself is congruent with the longer‑term financial plan.

We can look at everything individually and micro‑manage that, but to me, the most important thing is how is this group of asset classes, how is this portfolio serving the client and what the client wants to do and needs to do? It’s really important, and I love the way that you broke the fixed income into the high‑quality government debt, that money that is your plan B if everything else is plummeting.

You always have that place to go for emergencies or for cash flow. Whether it be from the income, I think that we all have to be realistic that, with interest rates this low, the income component is not probably going to cut it. How do we create cash flow, which is a word that’s different than income? How do we create cash flow in a predictable and sustainable way?

I think the way you laid it out was brilliant, Alex. I love that, because we’re not allocating or putting 40 percent of our portfolio into something that’s not really going to do anything, but to maybe stage that part of the portfolio with the understanding that some of it is short‑term, some of it’s intermediate, and the rest of it’s longer‑term, rather than trying to predict.

Here’s a question. Is there any part of the bond market that we really should be focusing on, that you think, wow? You are one of the best managers, with one of the best companies in the world, and the most respected, if I may say, as a financial planner who, to be perfectly honest with you, as independent planner, I can go anywhere, I can work with anyone and recommend anyone.

J.P. Morgan just continues to come forward with really thoughtful, great answers to the problems that we’re trying to solve for our clients. In that fixed income area, what are you doing for your mom?

Alex: Absolutely, and obviously we need to think about the risk tolerances of each individual client and what’s appropriate. Right now, what I’m saying to clients is, now’s the time to be thinking about quality within our fixed income portfolios. How I’ve been positioning it is that, bonds are like bubble wrap that you put into your portfolios. When do I use bubble wrap?

I use bubble wrap when I’m trying to send a gift back to my mom in the UK, and I want that gift to turn up in one piece at its intended destination. Just a bit of padding and protection in case it hits any turbulence on the flight over. The same is true with investors and their fixed income portfolios right now.

What I want to do is try and find areas with quality, that I can just put into the portfolio to provide padding and protection, not just to bonds, but for the entire client exposure, so that if we do hit any turbulence, we’ve got that protection in place. For us, what that looks like is having a little bit of things like municipal debt, in part, where we think it’s appropriate.

Also, putting in some core US treasuries. Yes, it’s low‑yielding, but it does a good job of diversifying the portfolio. What we’re also looking at is high‑quality corporate credit debt, those companies that have the AAA credit rating, which is the highest credit rating that you can get.

Safe, secure firms that will be able to see through this disruption caused by the virus, and continue to honor their financial obligations. All of those sort of companies and opportunities put in together establish some degree of quality. What that does is just adds that bubble wrap, that padding and protection that we think is really important for weathering the challenges over the next few weeks and months ahead.

Patti: That makes sense in any environment, doesn’t it? To a certain extent, having a portfolio laid out just as you’ve laid it out for us today is just really good planning because we should always expect that things are going to happen that we’re not going to expect, and we can’t predict.

We don’t know if these things happen, and that bubble wrap can really protect our clients’ futures by making sure that everything isn’t going to break.

Alex: Absolutely. That sort of diversification benefit is a long‑term investment scheme. Regularly, when we talk to clients, they’re always chasing after the latest hot topic. I would encourage right now, after the volatility we’ve seen in the last few weeks, think about the discipline that can be brought around by having diversified portfolios.

It is more important than ever that we’re emphasizing that point, Patti.

Patti: I can’t think of a better time. I mean, we are living it right now. Companies that nobody would have ever thought would be in jeopardy of going into bankruptcy, whether it be the cruise lines, or airlines, or a company like Boeing, for crying out loud, Boeing, and yet they’re on fumes.

Those people, like us, and as you are advocating, who have diversified, who have gotten that professional management, and to be perfectly honest with you, and folks, those of you who have been listening to my podcast in the past, this is an area that we don’t play in the sandbox.

You either do it, or you don’t. In my opinion, the best thing that you can do is to accept the humility, as I have, over 30 years of trying. I accept the humility and understand that there are people out there that specialize this. They live and breathe it. They know the companies. They know their ability to maintain those payments because that’s what debt is. That’s what bonds are. It’s debt.

What companies and their senior management really emphasize having a strong balance sheet, lot’s of cash, and are ready for almost anything that might hit them? Those are the companies that have that mentality going in, are the ones that are surviving and doing just fine right now. As much as we think we might want to know, because it’s a household name, you just don’t know.

The people that live and breathe this stuff, like the Alexes of the world, they do know. They’ve done the research. They knew a year ago these companies, how they could sustain something like this. Again, this is pretty extreme, and that’s the whole point of diversification. Yeah, while they may have a bond with Boeing in their portfolio, they have 200 other issues that are just doing honky dory.

Here’s one more question for you, and I’m just curious because I know that you’ve been thinking about this, Alex. This is a really significant disruption in our lives. You and your team, how do you view the way that we are working now, the way we may or may not travel, how we relax, eating out, and how we’re even communicating? How do you think about the portfolios?

Should we adjust our portfolios accordingly? For example, should we be overemphasizing growth, which is that emphasis digital, pharma, and healthcare? Or, conversely, do you just think that everything is going to go back to where it was, two to three years from now?

Alex: I think it’s important to acknowledge that in the course of humanity, every now and then, we have these life‑changing events that cause fundamental rethinks amongst society about how individuals conduct business, how they work, how they spend their free time. I believe that the coronavirus has the makings to be one of those society‑changing events.

Therefore, we almost have to rethink many various aspects. We can probably spend the next hour coming up with a long laundry list of potential changes. Let me try and highlight a few areas, both amongst how consumers operate, but also how businesses are going to function.

Firstly, within the consumer, one of the biggest changes that we’re probably going to see is just how individuals spend their time and money. We’ll see large avoidances with crowds, going out and spending money in hard and fast brick‑and‑mortar retail stores, and instead favoring spending more money and time online. You’ll also see how people decide to spend their finances also shift.

One of the challenges that this virus has highlighted is quite how many individuals were actually struggling with very limited amounts of savings. There wasn’t a huge amount sitting in their bank accounts to meet sudden shocks and expenses. One of the things we’ll see during the next expansion is that consumers adopt a much more fiscally conservative approach to managing their money.

Operating more as a saver than a spender. That’s quite a dramatic change, so those shifts will be quite significant. On the business side of things, we’ll also see some changes. Firstly, businesses are likely to be much more willing to allow their employees to work from home, or work remotely.

Firstly, it’s great for them as they start to be able to cut down on expensive office space, allow businesses and employees to operate wherever they would like to do that. That more footloose, fancy‑free approach is going to involve some degree of infrastructure investments, and people building up some technological capabilities to allow that to happen.

I do think that this prolonged period of working from home or working remotely will have encouraged businesses to embark on those programs. Another big change that we might also see is, businesses are going to likely rethink their supply chain management over the next few quarters and years ahead.

One of the things that the virus has really highlighted is some of the challenges with having geographically diversified supply chains. For the last 30 years, we’ve seen significant globalization. That has brought many economic benefits, but it’s brought the challenge of having US companies operating supply chains that incorporate many other countries and regions around the world.

When we see these viruses hit, that’s a big challenge as factories go offline. I think one of the things that we will see post this virus when the dust settles is businesses start to rethink how their supply chains are set up, and try and simplify them from a geographical point of view.

We also need to remember that, whilst it was only a few months ago, it may feel like years ago, but we were talking very much around trade tensions, they have not gone away entirely. Therefore, that, combined with the coronavirus, likely helps start businesses down this path towards simplifying the supply chain. That is just a few little nuts and bolts of maybe what we might see happen.

There will be much broader overarching discussions that we could do an entire new podcast on those topics, I think, Patti.

Patti: I’m sure we could. Wouldn’t it be great if you and I could fast‑forward five years from now and just simply look back and know exactly how all of this played out?

Alex: [laughs]

Patti: It would be fun, wouldn’t it?

Alex: Yeah, if I had my crystal ball working like that, that would be one benefit for all of us, I think.

Patti: You know what, Alex? While we can’t exactly do that, I will say that having you here with us today was a great runner‑up. I got to tell you, thank you so much for sharing your knowledge, your insights, and your wisdom with all of us today.

Alex: Thank you very much for having me. I really enjoyed the opportunity.

Patti: Folks, thanks to all of you for joining me as well. You all know me pretty well by now, and I know you know that I will always give it to you straight. There’s a lot that we don’t know yet. I believe there’s going to be a lot more uncertainty and difficult times. I do believe we are going to get out of this, and we’re also going to learn a lot in the process.

In the meantime, if you have any questions or want to know how to apply some of these insights that Alex shared with us today, please feel free to go to our website at keyfinancialinc.com. In the meantime, please stay safe, healthy, and by the way, sane.
I hope you have a great day. Take care.

Ep43: Financial Literacy – It’s Not Just for Adults!

About This Episode

April is Financial Literacy Month and today, perhaps more than ever, Patti is urging her listeners to be financially aware. In this podcast, she stresses the importance of teaching financial literacy to our children, starting at an early age. She is joined by fellow CFP, Mac Gardner. Mac is the author of “The Four Money Bears” and “Motivate Your Money”. Mac shares his research findings teaching children and young adults about the four things that you can do with money and talks about the app that is being developed to empower our young people with greater financial awareness.


Patti Brennan: Patti Brennan:  Hey, welcome to the Patti Brennan show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is Mac Gardner. Mac is also a CFP, and he brings to the table is something really unique. He’s written the greatest that I’ve read for kids to teach kids about money. Mac, welcome to the show.

Mac Gardner: Patti, thank you so much for having me. This is great. Not very often you can say that you’re being interviewed by a hall‑of‑famer, so I can check that one off my list.

Patti: Aw, well, thank you so much, Mac. That’s so nice. You, in my mind, are a hall‑of‑famer for the children out there who want to learn about money. I’m curious, tell us, let’s start.

Tell us a little bit about your background. How’d you get started, and what made you want to write a book for children?

Mac: “The Four Money Bears” books is actually my second book. My first book is titled “Motivate Your Money.” When I had my practice in Houston, it took me a few years, and I wanted to created something that would allow me to share what I jokingly call my Mac nuggets, or my little tidbits of being a financial adviser in the business for 20‑plus years.

I wanted to be able to share some of this knowledge with my clients, who are adults. I wrote that book. I gave it to clients. I gave it to prospects. About a year into it, one of my clients came to me.

She was on the board of an organization in Houston that supports children of color. She said, “Mac, I love your first book. It would be really neat, though, if you could maybe make something for kids.”

She said, “We never really any sort of financial literacy or guidance growing up. Would you be open to creating something that a child would understand and a child would appreciate?” I sat, I thought about it, and took some of concepts from my first book.

In my first book, I talk about the five steps to financial success. Plan accordingly, spend cautiously, save diligently, invest wisely, and give generously. Then I said, “OK, what could a child understand?”

Kids like bears, [laughs] so I created this book called The Four Money Bears. What it really does is it teaches children that there’s only four things you can do with money, spend it, save it, invest it, give it away.

Patti: I just love that. It is such a wonderful way to communicate the four things that you can do with money in such a simple, profound way. You mentioned financial literacy. I don’t know about you, Mac, but that almost sounds almost insulting.

We talk about Millennials and the fact that Millennials have the lowest financial literacy rate ever, and that a lot of kids graduating from high school and college really don’t understand how money works.

I think it’s wonderful that you’re out there getting the kids at a younger age, at the elementary school age, in such a way so that it’s not so intimidating. How did you drill down on that concept? Is it something that you’ve been thinking about? Do you have kids of your own, for example?

Mac: Yes, I do. I have three little ones. If they were all here right now, and I asked them, “OK, kiddos, what are the four things you can do with money?” They say, “We know, papa. Spend it, save it, invest it, or give it away. We know.” [laughs]

The book, interestingly enough, is the story of me teaching my children about the four things they can do with money. We jokingly in our house call each other Mama Bear, Papa Bear, and the Baby Bears.

That was a factor in developing the storyline as well. What was really interesting was I would have clients come to me and ask, “How can I start the conversation?” Patti, it was, “How can I start the conversation?”

I started doing some research on my own and realized that an Oxford study shows that a child’s connectivity or awareness with money actually starts by age seven. I said, “OK, how can we put something together where it’s fun and easy for a parent to sit down with their child?”

Especially a parent who never got the financial literacy, or the financial knowledge, or financial guidance ‑‑ we’ve got to find a new word for that, you’re right ‑‑ when they were younger. How do we get them a tool to sit down with their little ones and start the conversation?

I think that’s some of the best reviews that I’ve gotten from folks is the tool really makes it easy for a parent with a young child to start the conversation.

Patti: What I loved about the book, Mac, was the fact that it was truly a story, that the four money bears, they weren’t doing it all correctly in the beginning. Even Spender Bear, that’s obvious.

Spender Bear was spending all his money, but Saver Bear saves every dollar she earns. She’s always got money in her piggybank, in her closet, etc., but she doesn’t buy nice things or have much fun.

That’s not OK also. There’s a balance with that. Investor Bear invests all their money but runs into the same difficulties. Then Giver Bear gives it all away.

I love the fact that you integrated the four money bears and say, “Doing things all by themselves, in isolation, without consideration to what the other three bears were doing, doesn’t necessarily create the outcome of a great life.”

How you integrated that story to bring them together in such a way to create a balanced life, as it relates not just to money, but quality of life as well. I loved how you do that, and I think that’s terrific how you can explain that balance to kids in a meaningful way that they can understand.

Mac: Thank you. The idea of a budget was something that I was trying to get across. I do something when I present the book to elementary school students. I do something called the $100 bill challenge.

Patti: What is that? I heard about that. Tell me more about that.

Mac: I was trying to find a way…I’m a huge fan of public speaking, and I call it the three Es of public speaking. You want to engage, you want to educate, and you want to entertain. I was looking for a way to try to grab these young minds and grab their attention.

I said, “If I bring out a $100 bill, and I asked them, if I gave you this $100 bill, what would you do with it?” I really didn’t know what to expect, but an amazing trend started to happen. I would take the $100 bill, and I would ask them, “What would you do with it?”

Hands would fly in the air, “Oo, ah,” and, “Oh, I’d buy this,” or, “I’d buy that,” or, “I’d get this,” or, “I’d get that. Pokémon cards, sneakers, or something. Then I said, “Huh?” Then there would be the one child that raised their hand, and they’d say, “I’d put it in my piggybank.”

I said, “OK. I don’t think you’re being honest, but thank you for being different.” What it showed me, Patti, over the long run – and I’ve done quite a few of these presentations – is that children are wired, almost programmed, to consume from a very early age.

Patti: Boy, isn’t that interesting? That’s the influence of advertising, TV, and all that. I think it’s fascinating that that’s really what they were going to do with a $100 bill.

Mac: They would consume. They would buy. The two things, what it showed through this experience, or through these various experience, or numerous experiences, is that children are familiar with the concept of spending and saving.

However, the other two functions, which are investing and giving, the sense of altruism, weren’t really present. The thought process is, “OK, if there are only four things we can do with money, but they know what two of the four are, this is a good time to at least put into their awareness what these other two functions of money are.”

What investing is, and why investing is different from saving. I would use the analogy of the $100 bill and say, “If you went to a bank, and you put this $100 bill into a bank, a year from now, you’d have $103,” [laughs] especially in this interest rate environment.

Whereas investing, if you were to invest that $100, a year from now, you could have $200, or you could have $50. That’s the difference, is that factor of risk. You can potentially earn a lot more, gain a lot more, but you can also potentially lose money.

I try to find ways to explain and introduce this concept of investing at an early age so that now, these kids can go home and say, “Hey, you know what? Mom, Dad, I heard about this idea, this other function of money that it can make more money over the long term.”

That’s something that a lot of these children probably never had, especially if their parents never received that guidance themselves.

Patti: It’s interesting, because with my four kids, I tried to introduce the concept of delayed consumption. For them to imagine themselves, if they were six years old, were going through Kmart, and they would get what we call the gimmes.

Basically, we’d go through the aisle and say, “Mommy, can I have that?” I’d say, “Remember what the rules are. No gimmes.” I wanted to introduce the idea of the delayed consumption and to say, “When you’re 7 years old, if we don’t get this today, let’s think about what that could mean when you’re 7, 8, or 10 years old.”

Or, “Maybe when you’re 16 years old, like your other older brother, and think about maybe if we can save and maybe put this money into something, you could actually buy a new bike.” Again, adopting it to their future self and the importance of keeping that into consideration was really, really key.

I’d love to tell you that it worked with all four of them…

…but it did have impact. They still remember it to this day.

Mac: One of the more powerful phraseologies or terms I’ve heard – I actually heard this at a conference, the eMoney Conference last year – an adviser with young kids said she doesn’t say we can’t afford, she says, “We choose not to spend it on this.”

Patti: Oh, I can’t believe you…

Mac: To put that into your child’s mind.

Patti: It’s so interesting, because I can’t believe that you heard that at the eMoney Conference, because that’s exactly the terminology I’ve always used. It’s, “You know what? We could…”

Again, this is probably TMI, but growing up as one of seven children, to be perfectly honest with you, Mac, I grew up financially secure. There were a lot of things that we couldn’t afford. I didn’t want my kids to have that insecurity with money.

When we would go through those, the Kmart or what have you, I would basically say, “You know what? We could buy that today, but I don’t really want to do that. We don’t choose to do that. I’d like to save it for sometime in the future.”

Then we get into that conversation about what they’re going to be doing in the future, so we don’t choose to spend our money, instead of saying, “We can’t afford to buy that.” It’s OK in my mind for older kids to understand that there are limits to what a family can afford. At the younger ages, I think it’s probably premature.

Mac: Agreed, agreed. I like the ability through this book to open up conversations that probably may not have been had. One of the best compliments I think I’ve ever received about this Four Money Bears book is from a parent reading it.

Actually, several parents that have said, “Mac, thank you for not making this book too kiddie. Thank you for making this something where a parent can get something out of it as well,” while sharing the content with their kids.

We added worksheets in the back. There’s a budget in the back. They’re really neat tools that we’ve incorporated into it to really spur conversation and really make it an involved experience when talking about money.

Patti: Mac, it’s interesting, because you mentioned a parent talking to you about the book and how meaningful it was for her. We heard from people as well. Let’s take a listen.

“As a school librarian I’m always looking for ways that I can add to our school library collection both for students and for my teachers and the The Four Money Bears by Mac Gardner would be a great book to add to any library collection.” “The reason we are excited about this book is that it is aligned to the new math standards in the state of Texas and this is going to allow our students to be able to read about and learn about money in a different way.”

Patti: It’s interesting, because hearing from those parents and understanding our parents, what we were introduced to. I think it’s just such an important thing that we begin to bring this down to that next generation.

Mac, we were talking about eMoney. I think it’s really wonderful that they brought you to their summit. To be perfectly honest with you, I know a lot of people at eMoney – Ed O’Brien, Jessica, and Celeste – they have a very high standard for their speakers that they bring to their summit.

Anybody that speaks there, they’re speaking to the top financial planning professions in the country. Now, you were actually one of those people that was invited to speak there, weren’t you?

Mac: Yes, it was an awesome experience. What I love about it is eMoney’s mission is helping people talk about money. Their leadership team has been so supportive of our children’s financial literacy mission that you mentioned.

Ed O’Brien, who’s the CEO, Jessica Liberi, who’s Head of Product, and Celeste Revelli, she’s a director of financial planning. They’re all true believers in the power of financial literacy. They work daily towards eMoney’s mission to serve their clients.

They approached me last year and asked if I would be open to them created a one‑hour CFPCE course using The Four Money Bears. I thought about it, and I said yes, [laughs] I’d be more than happy, be elated to have that opportunity.

They said it would be in a breakout session, and I would present it at the summit in Austin. I’ll tell you, Patti, it was one of the proudest and most humbling moments in my career for several reasons. Number one, I don’t look like your typical financial adviser or CFP.

Patti: Welcome to the club, my friend.

Mac: [laughs] Again, I don’t look like the typical adviser, but they asked me to speak and share this knowledge in predominantly white male and female audience. Here I am, giving this, sharing this knowledge, and providing the guidance that I think can help parents with young kids

The folks at eMoney didn’t care what I looked like. They just knew that I had created something that could help a lot of parents, and it would resonate with the advisers, as you said, that are some of the top ones in the country and in the industry.

That’s really all that they cared about. That’s what mattered to them. I felt very blessed to have that opportunity to present and work with eMoney to help their clients have a better conversation and talk about money.

It was an awesome experience, and they’ve actually asked me to participate in future engagements, webinars, so on, and so forth. It’s fun to be able to go somewhere and feel that kind of value.

Patti: It’s interesting, because I’m also aware that you’ve actually been asked to be involved in the Fintech Bullpen, which is, again, a whole nother layer of opportunity that is being presented to you that isn’t really often presented to anybody else outside of eMoney and the fintech world.

Can you tell us a little bit about what the goal is and what you’re beginning to develop?

Mac: Sure. Folks who have read the book, they love the book. They’ve given it great reviews. Various states around the country, various advisers have utilized the book to help them.

One of the responses I frequently get is, “Mac, it would be really neat if there was a digital version of this. Is there an app for this? Are you working on some way to get this book out to young people through some sort of digital format?”

Patti: Wouldn’t that be awesome to have a gamification of The Four Money Bears? Wouldn’t that be amazing, because kids love games. The idea that you’re coming up with to digitalize the content and the concepts and make it fun for kids, it goes back to the three Es that you mentioned when you do public speaking.

You’re engaging them in a way to make that learning more permanent.

Mac: Yeah. The University of South Florida, of which I am on the advisory board of their personal financial planning degree program, they were presented with this Fintech Bullpen concept that I approached them with.

They said, “Mac, this is awesome.” The idea is to utilize the personal financial planning degree students and have them work collaboratively with the computer programming students at the University of South Florida, and make it a competition to get both worlds.

Get the fintech exposure for both sides and both students. Then I approached the leadership team with eMoney about this contest. Ed loved it, and Ed said, “We’d love to be involved,” because they are also working on gamification, but they’re targeting high school and college.

They really haven’t had any concepts that target elementary school. Ed loved it. He said, “We’re definitely behind it, and we’re going to support it.” Then there’s a company in Florida called Synapse, where they actually host these types of contests.

Patti: Mac, why don’t we take a step back? For the folks listening out there, let’s explain what the Bullpen is. I have participated in them. They are so much fun. For those of you who are listening, it’s basically a full day, and it’s a contest.

You have an objective, a goal, and you break out in teams. It is unbelievable the ideas that begin to come out. I just got back from Australia and New Zealand, Mac, it was amazing. There was a great speaker.

The speaker said each one of us is about five percent genius. Einstein was 25 percent genius. If we get 20 people in a room, that equals 100 percent genius. That’s the concept behind these bullpens, where we get people on teams, break it out, do the brainstorming, etc.

It is amazing some of the ideas that came out of the bullpens that I’ve participated in. Frankly, with eMoney, a lot of what we do with eMoney came out of some of the work that we did in the bullpens.

To take The Four Money Bears and apply that idea, I’m so excited about what that could do for our young people going forward and the impact that your book is going to make on children all over the world.

Mac: I agree. I mentioned to earlier in conversations that, when I published this book years ago, I really had no idea of the journey it would take me on. This mission to really just educate the future generation…

I heard a wise, I think it was Confucius, that said, “If your plan is for a year, plant rice. If your plant is for 10 years, plant a tree. If your plan is for 100 years, teach children.” My idea, this plan that we have, really is change the world and really change the way children look at money and how they are educated about it.

Ideally, we would love for the Fintech Bullpen to produce something or some things that we can provide to elementary school children, not just here in the state of the Florida, but across the country, and even potentially across the world.

I just feel blessed every day to help people as a Certified Financial Planner, and just work every day to help promote financial literacy and new ways to help expose children to making better financial decisions as a child so that they can practice healthy financial habits when they’re adults.

Patti: It’s wonderful. Mac, since you brought it up earlier, you talked about diversity and inclusion in the industry. Tell me more about that. Anything, from your experience over your career as it relates to that, or are you really focusing more on The Four Money Bears and getting it down to the children?

Mac: The number one goal, of course, is to educate the children, but thank you for bringing that up. I don’t know if you noticed, but the cover the book, four bears, they are all four different colors.

Patti: I love that. Love, love, love.

Mac: [laughs] Two of the bears are boys, two of the bears are girls. It was a definite nod to diversity and inclusion. The four bears are four different shapes.

I wanted there to be a subtle, or maybe not‑so‑subtle, nod to the fact that our industry and the advisers in it does not represent society from a perspective of advisers that are out there guiding people that look a lot different than the industry.

I’ll share a very quick story here. Years ago – you probably read investment news, but – I was reading through investment news when they introduced their first 40 Under 40. I was flipping through, and I was saying, “This is great. I’m glad that they’re bringing attention to an industry that is in dire need of younger people to get in to help more people.”

I’m flipping through, and I did not see…I saw very few people of color. I reached out to the editors, and I said, “Hey, could we not find maybe one or two people of color that could be included on this list?”

They asked if they could interview me for an article. They asked the reason why I believe there aren’t more people of color in the industry. I said, “Well, honestly, I think it’s a lack of education.”

If a child or young person doesn’t understand how many plays into their lives and the value of money, it’s hard for them to then realize that this is an actual profession that they can help other people do this themselves.

Short‑term, we want to help educate young people about what their money options are, what they can do with their money. Long‑term, what we would love to be able to see through this book is an increase in more diversity and inclusion in the financial advisory space.

There are more people of color and more women that are becoming advisers and becoming CFPs.

Patti: Wouldn’t it be cool if those young people could look back to The Four Money Bears that they read when they were five or six years old and say, “I want to teach other people about the four things they can do with money”?

That leads them into, to me, one of the most rewarding professions out there. It just the greatest profession. What an impact that you have on so many people’s lives. We get to do it. It’s a privilege.

For me, I wake up every morning, and I think, “Wow, I get to do this.” We’re going through a tough time right now in our country and in the world. People are worried. People are scared. What a wonderful position to be in to be able to give them perspective, give them comfort.

Mac Gardner, thank you for doing all of the above for us today and for our listeners. You’ve made a huge difference for so many people. Before we end, tell us, how do we get a hold of this book?

Mac: Sure. The book can be purchased on Amazon, [laughs] like many things. You can get it on Amazon. Or you can go to our website at www.thefourmoneybears.com. On the website, you can purchase the book.

We’ve also included some neat tools. I’ve created Bear Bucks that parents can print off of the website, for those parents who are looking to start giving their kids allowances and looking for different tools. You can also print off the annual budget on the website as well.

Two spaces to check out, if you’re interested, is definitely going on Amazon. Please lease a review. We’re very blessed, very lucky, we’ve had all five‑star reviews on the book so far. If you’re looking for other tools to help promote financial literacy, you can go to our website, thefourmoneybears.com.

Patti: A five‑star review on Amazon is not an easy feat. Congratulations, Mac. For those of you who are interested, we will put all of that information into the show notes. Go to our website. You’ll see everything in the show notes, this conversation, and the references that Mac just made.

Go out, get The Four Money Bears book. We’re ordering hundreds of them to give to our parents and grandparents to give to the kids, to begin having that conversation. Mac Gardner, thank you so much. You are my hero.

You are such a thought leader for our industry. Thanks for taking the time today to talk with me and talk with our friends who are listening out there. For those of you who are listening, again, go to the website.

Get the show notes. If you have any questions, want to give us a call, please feel free to do so. By the way, if you have any other topics, anything else that you’d like to learn about, let us know. We do these podcasts for you.

We’re really interested in making sure that it’s information that you want to learn about. Until next time, I’m Patti Brennan. Thank you so much for joining us.

Mac: Thank you, Patti.

Ep42: Is COVID – 19 Driving the Economy into a Depression?

About This Episode

This is part two of a special edition series of the Covid – 19 Pandemic discussion with Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators and professional athletes. In this episode, Gregg drills down his questions to Patti asking specifically if she believes our nation is headed into a Depression because of the current pandemic. Her answer and reasons for her answer may surprise you; tune in to find out why!


Patti Brennan: Hi everybody. Welcome back to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me again is Gregg Stebben. Greg and I just had a wonderful conversation about how the coronavirus is impacting all of you listening today and watching today, and Americans in general. How is it affecting your view on your health, your finances, and your family?

We changed the way we do this podcast. Greg Stebben is an amazing interviewer. He has interviewed presidents, Mikhail Gorbachev. He’s interviewed actors, members of congress. I think last week he just did an interview with Marco Rubio. This guy is it when it comes to service journalism.

What a privilege it is to have him with us again today. Gregg, thanks so much for joining us.

Gregg Stebben: It is great to be here, Patti. I feel like you are going to be the one doing the service journalism today because you mentioned to me in an off‑the‑mic call and then in an email that what’s happening today in the economy because of the corona virus, you don’t think we’re headed for a depression.

I have to tell you, I want to hear every thought you have on this. I know lots of other people do too. Talk to us about that because I think it’s a great fear for a lot of people. Help calm our fears.

Patti: Certainly, there is when you hear on TV and read in the newspapers that unemployment is going to go up to 35 percent and that GDP is going to crash. You know what, Gregg? We should be prepared that that’s probably going to happen.

The world has stopped. This is the ice age. Nobody is going out of their homes. Nobody is really spending much money. It’s a very difficult time and a lot of uncertainty. Isn’t this what leads to a depression?

I do not believe that we are going to go into a depression. Yes, it’s going to be ugly. Yes, the market is going to continue to be volatile because it’s always volatile when there’s this much uncertainty. With uncertainty comes fear. People just don’t want to deal with it.

However, let’s all take a step back and compare what’s going on now, maybe what happened during the financial crisis, and then what happened in the Depression.

Gregg: Before you go on, I want to ask a technical question.

Patti: Sure.

Gregg: Is there actually a textbook definition of what a depression is versus what a recession is?

Patti: Recession is defined as two back‑to‑back quarters of negative GDP. I think a depression is when you have negative GDP for an extended period of time. That’s what we’re really worried about – is, how long is this going to last? What’s life going to look like afterwards?

Now, there’s a couple of really fundamental things that I want to explain to you. First of all, let’s first define commerce. Commerce is defined as the exchange of dollars.

If I provide a service to you, Gregg, you’re going to pay me some money. I’m going to retain my profit. I’m going to go and pay Doug. Doug is going to provide his service, sell me his goods, retain his profit. Basically, what we’re doing is we are exchanging dollars.

What do we have right now? We don’t have much exchange of dollars. There’s no revenue coming in. That’s really scary. Here’s the thing. Let’s go back to the Depression. Again, we had no exchange of dollars. Unemployment during the Depression got up to 25 percent. Isn’t this going to be worse because it could go up to 35 percent?

Here’s the difference. During the Depression, there was no such thing as unemployment insurance. If you lost your job, Gregg, you had no cash flow.

Now, it’s going to take a while for them to figure this out with unemployment, but not only are people going to be able to continue to get an income, that income is ramped up. You get not only the normal unemployment, but they’re adding another $600 per week.

By the way, it’s going to last for an additional 13 weeks to give people money to be able to continue to consume, pay their rents, and take care of their families.

That’s number one. Now, to compare this time to the financial crisis, unemployment also got up very high, 10, 11 percent. The problem with the financial crisis is it took a long time for people to get back to work. They didn’t juice up the unemployment insurance.

What they found was that during the financial crisis, they were too slow, and they were too timid. I found it interesting. Neel Kashkari did a great interview on 60 minutes two weeks ago.

I so appreciated his transparency because he came right out, because he was very much involved during the crisis, and he said, “We made the mistake of being very concerned about only helping the deserving.” He said, “The problem with that is our programs were too targeted. When you’re going through a crisis, you got to get the money out there.”

We need to get money out to the deserving and maybe even the not deserving and keep commerce moving forward.

Gregg: In other words, better to overshoot than be too preoccupied with hitting the target and the bullseye.

Patti: Exactly. You’re hearing that from so many different leaders. Inside government and even outside, we have to overreact. It’s very important.

We can always trim it back, but right now we have to literally flood America with cash and cash flow, number one, for the basic, fundamental things that we all need but also for confidence because when people are insecure, oh my goodness, they pull back even further. They don’t pay their mortgages. They don’t care about their FICO score. They don’t pay their rents.

We have to give them a feeling of confidence that we are going to get through it. That was the first thing.

Again, during the Depression, we did not have this thing called unemployment insurance. In addition, there was no such thing as FDIC insurance. If you had money in a bank and the bank went under, you lost all of your money.

What’s different about today versus the financial crisis in 2008 is that our banking system is in much better shape. Our banking system and the financial system is sound. What they did after the crisis from a regulatory perspective, the banks were screaming, insurance companies were screaming, “It’s too restrictive. We can’t conduct business. We’re not going to have the profits.”

Guess what? Because of those regulations, our banks are in great shape. We don’t have an issue that is literally threatening the system that we all rely on.

I’ve got to tell you as a sidebar, yes, I’m worried. I’m a lot less worried today than I was during the financial crisis. That was, I thought, a lot scarier than today. I am very confident we’re going to get through this.

It’s going to get ugly. It’s uncomfortable. Our lives are different, but we’re going to get through it because the fabric of how we live life, and our economic system, and the way it works, that’s not being threatened as it was during the financial crisis.

Gregg: I want to ask a question about this, Patti. It actually refers back to a previous interview you and I did. We talked a lot about how good things could come out of this coronavirus crisis, not the same thing as saying we’re glad it happened, but it is happening. We have no control over that. Good things are going to come of it.

Could it be said that the soundness of our banking system today is a good thing that came out of the economic crisis or the financial crisis of 2008?

Patti: You better believe it. Absolutely, because again it comes down to confidence. The fact that we can be this confident about our banking system is a really good thing that came out of that crisis. I also think that the way that the government and the Federal Reserve handled the financial crisis is giving our current leaders a playbook.

When Ben Bernanke was doing these, he lowered interest rates. He did QE1, QE2, and QE3. Everybody was very uncertain because everybody was worried that that much liquidity sloshing around the system was going to lead to rampant inflation. Everybody’s brain started going back to the ‘30s when inflation was so incredibly high or the ‘70s when it got up to 14 and 15 percent.

That was a very bad economic outcome. At the time, everybody was very concerned about this. However, it didn’t lead to rampant inflation. This time, Jerome Powell could literally go on the shelf and pull these things off. This time, Jerome Powell didn’t do it onesie, twosie, threesie. He did it all at once.

He’s flooding the system with so much liquidity. It’s still going to take a little time for that to get through the economy, but mark my words, Gregg and everybody listening to this, it is going to work. It’s already working in the bond market. That is a really important thing.

The Federal Reserve has basically told us, “Look, we’re going to do whatever it takes for as long as it takes to get us out of this.” That’s important because the Fed, they can. It’s not QE1, 2, and 3. It’s QE infinity. As long as we know that, we can say, “OK. We’re going to work this out.”

Gregg: In our previous interview together, we talked a lot about your background. In a previous career, you were an ICU nurse.

I’m wondering if there’s an analogy to be drawn here between what happened in the 2008 financial crisis and what the Fed is doing today. It seems to me that sometimes when you go to the doctor, it’s such a bad thing, a virus perhaps. I’m not a doctor, so if I get this a little wrong, at least roll with the analogy.

Patti: I’m rolling.

Gregg: Sometimes, we try something and see how it works out. Sometimes, your doctor says, “We have to just kill it with antibiotics or kill it with chemotherapy. We have to do everything we got in our bag to kill it and kill it right now.” It sounds like there is a medical analogy here, how the Fed is behaving now versus how they behaved in 2008.

Patti: It’s a great analogy, Gregg. Think about it this way. If you go to the doctor, and the doctor diagnoses cancer, the doctor is also probably going to diagnose chemotherapy.

They’re probably going to tell you, “Look, this stuff is going to make you lose weight, throw up, and lose your hair. It’s going to be awful, but it’s the only thing that I know that can cure you.”

That’s what we’re going through right now. It’s very uncomfortable. We are getting our chemo. We’re getting this medicine. They’re doing it behind the scenes. I will tell you that, frankly, later on, not right away but be prepared a few years from now, our taxes are going to go up. Somehow, we’ve got to finance this.

Although, I think it’s pretty interesting that they’re talking about bringing back the war bonds. I don’t know about you. I’m finding, looking around, there’s a lot of patriotism that’s happening right now.

Even though we can’t hug each other, even though we’re not together like we normally are, there’s this basic human need to feel that presence of another human being. Granted, we can’t touch right now, but we want to touch in different ways. Americans are doing that right now.

I think everybody does understand that eventually we’re going to have to pay for this. This is what the federal government is there for. This $2.2 trillion bill they just passed is a very big deal. They’ve never done that. Guess what? They’re not done. That bill is 10 percent of our GDP. That is a huge deal between that and what the Fed is doing.

Now let me break this down for you because I think it’s important for everybody listening to know. The Federal Reserve, they can’t restart the economy. The Federal Reserve’s role is to contain the damage. The Treasury’s role is to restart the economy. That’s why you’re seeing two packages.

The Fed has their fire hose on. They’re putting tons of liquidity into the economy. The federal government has come out with this $2‑trillion package.

Now, most people believe because this has been so dramatic and deep that it’s really not a stimulus bill, it’s a relief bill. Guess what? It is going to provide relief to small businesses, to people. We’re going to get our checks eventually. We’ve got to just get through this period of throwing up and losing our hair.

Gregg: The cancer analogy becomes very useful here because if my wife came home today or one of your kids came home today and said to you, “Mom,” or to me, “Honey, I have cancer. It’s going to take 10 percent of everything we have to fight it,” I’m going to spend the 10 percent.

Patti: There you go.

Gregg: If it’s 20 percent, 30, but I’m going to spend every dollar it takes to kill the cancer. What you’re describing is a cancer on our economy.

Patti: You know what, Gregg? I love how you just took that one step further because, in the end of the day, I think that’s what’s going to happen. At wartime, it’s typically closer to 30, 40 percent. That’s what ended up getting us out of World War II.

As a sidebar to get back to the Depression, a lot of people believe that it was actually World War II that got us out of the Depression. You want to know what? Guess why? Because the government basically came out with all the spending. It was this wartime. They went through 30 to 40 percent of GDP to get us through the war.

Gregg: All of a sudden, there was jobs. There was a budget. There was a pressing need, like cancer, that, “We have to do this. We don’t have any choice. We can’t spend a lot of time talking about it. We just need to act now. Our lives are at stake.”

Patti: Exactly. That’s what’s happening now. Let’s put politics aside. We have to give credit where credit is due. These leaders, whether we like them or not, are actually finally, again, we say after three weeks finally, but they are coming up, and they’re rising to the occasion and doing everything that is necessary to get us through this as a country.

The other thing, Gregg, if I may say to take this, remember, let’s go back to the beginning of the show. We talk about commerce, the exchange of dollars. Why am I so confident that we’re not going to go into a depression?

Here’s another thing. Go back to the Depression. There was no such thing is Medicare. There was no such thing as welfare. To me, one of the biggest reasons is this pay‑as‑you‑go income tax that we all love to hate, that didn’t exist back then.

Here’s the deal. You did have to pay taxes. In fact, they were due in October. How did you do your taxes? You filled in the numbers, and you sent it in. Gregg, it is the Depression. What do you think compliance was like?

There was no such thing as a computer. The federal government was not in a position to do what they are doing today. They just weren’t.

They didn’t have the cash flow. We were not the reserve currency of the world as we are today. We couldn’t print money. We can today. It’s also been tested.

We, as human beings, are learning animals. Guess what? We’ve learned. Ben Bernanke got his PhD from Princeton because of his work studying the mistakes that were made during the Depression. He did exactly the opposite.

During the Depression, the Federal Reserve choked off credit. Hoover was influencing the Fed. It wasn’t a separate body as it is today.

Hoover was freaking out because he thought that having a balanced budget was the most important thing a government could do, and so the Federal Reserve choked off credit.

You ready for this, Gregg? Guess what? You know what they did during the Depression? Not only did they not lower taxes, they increased taxes because they didn’t have the revenue, because people weren’t compliant. They increased tax rates on the only people that were making any money.

The other thing is that prior to the Depression, the Roaring ‘20s, if you had a stock market account, chances are you had 90 percent of that account on margin.

Gregg: Yes.

Patti: Debt, especially as it relates to investments, is a really scary thing. What happened is when the market crashed in ‘29, everybody got these margin calls, which means that they were forced to sell their stocks maybe when they didn’t want to, and that’s what really led to the significant and permanent losses that were experienced in the Depression.

Today, you can’t do that. You can only go 50 percent on a margin account. Frankly, people aren’t doing margin like they used to because Americans in general, especially after the financial crisis, you should see the figures from the Fed. It’s amazing how Americans have reduced their debt load significantly.

They don’t have the mortgage debt going 90 percent on your home. That doesn’t exist anymore. The credit card debt has decreased. People aren’t going out and getting these car loans like they did. Household debt has plummeted. It’s really been a very, very good thing.

Now that’s the good news. The bad news is corporate debt has risen, so that’s something that we have to be aware of. Frankly, this crisis is going to catch a lot of those companies that were overleveraged, and most of them, or many of them I should say are going to fail.

As many of them that fail, there are going to be others that will thrive. We’re already seeing that. We’re hearing about companies that we never heard of before.

They are innovating. They’re coming up to the table. They are repurposing themselves, stepping up, making masks and ventilators and the PPE equipment that I, as an intensive care nurse, so needed when I was taking care of those patients with AIDS and other viruses, that not only saved my life but the lives of the people that I love.

People who are working in the hospital, my friends, they don’t have the equipment that they need. That’s the bad news. The good news is that companies are coming forward and providing it, even if it isn’t what they used to do.

Gregg: I want to jump in here for a minute. Let’s talk about that a little bit more. I, too, have been watching that phenomena and I’m fascinated by it. It seems to me that when companies like GM are forced…not forced. There’s not a gun to their head, I don’t think.

Forced because of circumstance to transition from what they’re normally accustomed to making – cars, to making ventilators or masks – I think one of the great outcomes of that for them as a company and for the people who work there is that they discover a nimbleness in their business and their capabilities that they probably never would have discovered.

Frankly, the lack of nimbleness was probably hurting them and was going to continue to hurt them over time.

It seems to me that even at a corporate level, this can turn out to be a blessing in spite of the fact that it’s also awful at the same time.

Patti: How insightful that is of you to realize that. I have four kids, Gregg. I will tell you that when they were little, I would force them to do their homework, and I would force them to study for their tests.

Gregg: Play the piano or the violin or the…

Patti: Exactly. They didn’t want to do it, but they did it anyway because they had to do it, like GM and 3M and those companies. They didn’t want to do it, but they were being forced…

Gregg: Maybe they did want to do it, but they never would have done it if they weren’t in dire circumstances.

Patti: Well, that’s a good point. Actually, we should give those leaders some credit as well. I think that they are being…Well, that’s a whole sidebar, but anyway.

You think about the kids. Now I will tell you, my youngest, I would force him to do his homework and all that kind of stuff. Guess what he discovered? He’s really good at math. He’s a senior in college. He’s majoring in economics. He’s acing those classes.

God only knows what his life is going to look like, and it all comes down to the fact that he did his homework. He learned Excel. He wasn’t intimidated with those very complex, 10‑page formulas that he had to do because he learned. He wouldn’t have known what he was capable of unless he had to do it.

Gregg: He listened to his mother.

Patti: Sometimes, Gregg.

Gregg: You’re bringing up a really interesting point, and I’m surprised we haven’t talked about this yet.

What is the impact of technology on whether we will or won’t? You’re making a very strong case for why we won’t have a depression.

How does technology play into all of this to enable us to avoid a depression under these circumstances?

Patti: It’s a good question. I think when you go back to the Depression, first of all, our population was much lower. There weren’t as many people.

This whole aspect of this shutdown, the isolation, it’s the technology that is allowing us not to feel that far apart. Again, even something we take for granted, like the telephone.

People didn’t have phones back then. You couldn’t talk to people over a telephone. What was that? That was just beginning to be mainstream, but it really wasn’t what it is today.

We’re doing this on a video. We can FaceTime the people that we love. We can actually conduct our business. Yes, I’m a small company, but frankly, we’ve got one of the largest wealth management firms in the country. We have not missed a beat because of technology.

That’s pretty cool. That’s why it’s very different. I think you’re right. Technology is making all the difference. It’s another reason why those companies are probably going to thrive.

Gregg: Well, and it’s also interesting that during the Depression, or even if you go back to the 1918 Spanish flu, if people had to stay home, there was no money being spent. I don’t know about you, but making me stay at home actually makes me spend more money.

Dollars can continue to flow through our economy even if we’re sheltering in place in a way that wasn’t even possible 20 years ago.

Patti: That’s exactly right. The dollars are just different, right? The spending on gasoline, for example, is down 50 percent.

We’re not driving. We’re not spending as much money on gasoline. That’s going to have an impact on that industry and the companies that operate in that industry.

On the other hand, look at Amazon. They can’t hire enough people. They can’t get the stuff that people want fast enough. Amazon’s going to do very well, as will the products that we all want.

There’s a lot to be said for retail therapy. I’ve been engaging in it myself, right?

Gregg: Oh, it’s not just me?

Patti: Oh, no. No, no, no, no. It is Americans, and that’s OK. You know what? That’s OK. Whatever it takes. We can all go outside and walk. I’ve met more people, Gregg, in the last three weeks than I ever did.

I’m not a walker. I will tell you, I’m not a walker. I’m not a meditator. Anybody that knows me, knows I’m not sitting still long enough to meditate, for crying out loud. Walking just isn’t fast enough.

Having said that, [laughs] I will tell you that I have just needed to get outside for fresh air because I’ve been cooped up in the house like everybody else.

I’ve met more people. Granted, we’re across the street, but I’m seeing the same people over and over again, now. It’s fun. It’s cool. Things are going to come out of this that are very good. We are connecting. That’s the most important thing.

Gregg: I want to ask you, really two last things. One is, is there anything more about your belief that…Are there any other thoughts you want to share with us about why we’re not going to enter a depression?

On top of that, I want to hear you talk for a minute or two about the conversations you’re having with your friends, your family, your clients, and your team members, about the other kind of depression.

How people can be concerned about money, but what I think you’ve done here, is really give people a lot of hope for all the things there are to be concerned about that, if there’s a sick loved one in your family, or a sick friend, or just in your community at large, because there’s a lot of people that are going to get sick.

Can you say a few words just to relieve the part of our brains that are worried about our money? You are very hopeful that it’s all going to work out. I’d love to hear you address that.

Patti: It is very interesting. My mom, one of the most…the wisest woman I have ever known, used to say to us when we would go through those bummed‑out periods, she’d say, “You know what? When you feel bummed‑out, go out and help somebody.”

Give of yourself. Whether it be your money, your time, your intellectual intelligence, your ideas, give it away. There’s a powerful thing that happens in our brains when we do those things. This is why volunteerism is so powerful.

Studies have shown, Gregg, that people who volunteer, that the impact on them physically, is equal to exercising four times a week. What happens is, when we do something for another human being without any expectation of anything in return, like what you and I are doing today, we’re not going to get anything out of this.

You have time for this like a hole in the head. I could be doing a few other things but we want to make a difference in the people that are listening. What is that doing to us physiologically? Guess what? Your dopamine is going through the roof, as is mine.

Our brains are secreting oxytocin. Dopamine is a feel‑good type of thing, as is oxytocin. It’s a wonderful feeling.

When we get that just general good feeling, it gets us out of our own skin. It helps us to realize that, “You know what, we don’t have it so bad.”

There are other people who have it a lot worse than us. All we have to do is reach out to another human being who maybe doesn’t have it as well as we do, and to remember that.

Keep that perspective. Don’t just keep the perspective, do something about it. That’s what I’m telling people.

Gregg: I want to thank you so much for this conversation. You have relieved me and many of my fears about what’s happening. The depth at which you’ve thought about this and shared those thoughts with us, I find to be very, very useful.

Patti, thank you so much for letting me come on your show and interview you.

Patti: Gregg, thank you so much. This has been a great exchange. You have a way of asking questions and pulling out of me stuff that comes from inside. We didn’t practice. I had no idea what you were going to ask me.

As I said in the beginning before we went on air, I said, “OK, Gregg, we’re just going to wing this, right?”

I hope that it was helpful to everybody listening. I’m so grateful to all of you for taking the time to listen to this today. If you have any questions, if you’d like more information. Why don’t I believe that we’re going to go into a depression?

Feel free to visit our website. Ask a question. Reach out to us. Call us. I’m happy to help any way I can.

Remember, that’s my brain on steroids. My dopamine receptors are going nuts right now. That’s what we’re here for.

Gregg Stebben is the leader in service journalism. I hope that when this is all said and done that people look back at this and look at us as we’re in the service of Americans as it relates to not just their wealth management, but also their health, and their family, and providing security in all areas of your lives.

Thanks so much for joining us today.

Ep41: Covid 19 – The Threat to Health, Wealth & Family

About This Episode

This is part one of a special edition series with Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators and professional athletes. Gregg asks Patti the hard questions regarding the global pandemic the world is now facing. Covid – 19 is not just a health threat; it is turning the world economy upside down and threatening the safety of our loved ones. Patti’s professional background as an intensive care ICU nurse, coupled with being CEO of a nationally ranked wealth management firm, provides a unique perspective on the ramifications of this deadly virus.


Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show.” Whether you have $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Boy, that statement couldn’t be any more true than it is right now. We are in the midst of a really big crisis. This is really a scary time for everybody, not just here in the United States but on a worldwide basis.

Because we are in such a time of great change, we’ve decided to turn the tables on how we normally do things here on the Patti Brennan Show, and I’ve invited my good friend Gregg Stebben to join us as a guest host today.

He and I were having this really interesting conversation last week, and in the midst of the conversation, Gregg said, “You know, Patti, we should really be recording this.” I said, “Well, Gregg, you know what? We can.”

Today, what we’re going to do is we’re going to be talking about what is going on in the world, and what we think about what is going on in the world.

There is no better person in America who can pull this out of us than Gregg. Gregg has interviewed presidents, members of Congress. Last week, he just interviewed Marco Rubio, for crying out loud.

He is a leader in what is referred to as service journalism. This man has made it his life mission to write about and do radio shows on the things that we need to know. The way he does it is so unique. It’s not necessarily the things that he’s advising. He’s going out to the experts.

Again, not that I’m necessarily the expert per se, but for whatever reason he just wanted to say, “Patti, let’s have that conversation. Let’s record this conversation so that people in America can hear what you’re thinking and what you have to say and how you’re guiding your clients.” Gregg, thank you so much. Welcome to the show.

Gregg Stebben: Thank you, Patti. It is so great to be here. I hope I can live up to that introduction. It’s fascinating for me to be here with you. First of all, I want to share that you and I did an interview some months ago at an event that I think just went live on the Forbes Books website at forbesbooks.com. You and I really, I felt like, really bonded in a very deep way.

I remembered, as I was getting ready for this interview today, you told me something in that interview that I had forgotten. I’m not sure everyone listening knows. I think they should. That is not only are you the President and CEO of Key Financial, but in a past life you were actually a nurse working in ICU.

In a sense, given what are really the essential details of the coronavirus, it’s not just a health crisis, but it’s also causing a financial crisis. I can’t think of anyone I would rather be talking with than you.

Patti: Thank you, Gregg. That’s so nice of you. It’s been over 30 years since I donned my scrubs and stethoscope and face mask. At the time, we were facing different epidemics. It was the AIDS epidemic and toxic shock and things of that nature.

A lot of the fear that so many people are feeling today, that’s what we were feeling back then as well because we weren’t sure exactly how it was transmitted. All we knew was that we didn’t have a cure. That’s so scary for families and people who are going through it.

I will tell you, Gregg, that being in the ICU, watching, being that person who that patient counted on for literally their lives, sometimes not being successful at that, and watching them pass, usually all by themselves – again, it was a virus that we didn’t know how it was transmitted – it really gave me perspective of what’s important.

I know that you asked me this when we were together. How in the world do you go from being an ICU nurse to being a financial advisor, a financial planner? Yet so many of the skills that I used in the unit are what I use today.

As difficult as this is, I’m so blessed and grateful for having that background. The one thing that doesn’t change, Gregg, is the human body, our immune responses, the medicines that we have available or not available, the difference between bacterial infections and viral infections, why antibiotics work for bacteria but they don’t work for viruses, and what can work.

I’m so grateful for having that background and the impact on the human body. We can bring this into what we do for our clients in terms of not only how to keep themselves and their families healthy, which is really all that matters to me, but also to keep them financially healthy and to understand what the potential implications of the virus could be and what we’re going to do about it.

Gregg: What’s fascinating in that is that it’s at times like this that I think all of us – and I’m including you in that as well, even though you did spend years working in ICU as a nurse and now you are a financial advisor – I think it’s times like this that really force us to open our eyes and understand what is so important.

You just said that safety, security…and I imagine that your years working in the ICU and the years since working with your clients has given you an ability to make your team feel cared for, and also make your clients feel cared for in a way that you might not be able to do if you didn’t have being an ICU nurse in your background.

Patti: You know, it’s really interesting, Gregg. I didn’t think about this until last week, but I was thinking about our tagline. I can’t think of any better time to really look at that, and — you mentioned my team — and communicate it to my team. Who are we? What do we do?

We do wealth management with wisdom and care. That’s our tagline. That’s exactly what we do. Unfortunately, I’ve been through stuff like this before, whether it be from a health perspective or financial perspective. I started in the late ‘80s, went through the crash of ‘87, went through the ‘90s and the tech bubble, and of course the financial crisis.

I’ve been through several of these. I know what it feels like. It feels awful. I hate it, Gregg, but at the same point, I also understand that we are going to get through this. I understand what the Federal Reserve is doing, and what the government is doing, and I believe they’re going to be successful. We are going to get through this.

You mentioned the market. The market’s up big‑time today. Now, is it going to stay that way? Maybe not. We’re going to go through a period of volatility. This is a fear‑driven environment, whether it be related to our health or our money.

Fear goes both ways. When the markets were plummeting a thousand, 1,300 points, it was a fear of losing. Today we’re having the fear of missing out — FOMO, as my kids call it. People are worried that they’re going to miss out on the recovery.

The market is a forward‑looking mechanism. It’s one of the leading indicators. Unemployment is a lagging indicator, although the two of them are both crashing at the same time. We had a record last week of 10 million people, literally, applying for unemployment. That’s never happened before. It’s a scary time.

The market’s just trying to digest all this information, and the implications as it relates to the economy. We’re all at home. Everything’s shut down. How much longer are we going to be staying away from work, and what does that mean for our incomes? What does it mean for our portfolios? Are people going to be spending money the way that they used to?

Things are going to be different, Gregg, but different isn’t always bad. We just have to learn how to do different.

Gregg: One of the things I want to ask you about relative to the market itself, and I want to point out that we’re recording this on Monday, April 6th, at about 3:00 P.M. The market is up 1,200 points.

I want to timestamp this simply because things are changing so fast. By the time people are listening to this, you may have an idea of where the market’s going to be, and if you do, I’d love you to share it with us.

I have no idea, and I think most people have no idea. That leads me to my next question, which is, in this time of uncertainty, is what we’re seeing actually rational? Does it actually make sense? Will we be able to at least look back at it and say, “Oh, that does make sense”?

You just talked about the fear of missing out. Can you see some order to what’s going on right now economically?

Patti: You’ve asked, is the market rational when it’s plunging a thousand points, or 1,300 points? Is it rational? I would offer that it is, based on the information that we have right now.

Think about it this way — if I want to sell my home, let’s pretend that I throw $200,000 on my kitchen table. I go outside. I plant a sign right on my front lawn that says, “Home for Sale — Contents Included. Offer Expires 12:00 Noon Tomorrow.” 12:00 noon comes. It’s tomorrow, and nobody has put a bid in for my house. What do you think the value of my home is?

Gregg: I would have bid 200,001.

Patti: You’re a smart man because you know what’s on my kitchen table. Actually, nobody put in a bid for my home. What’s the value of it? It’s actually zero. Nobody wants it. That’s what’s happening in the markets today. It happened in the bond market. It happened in the stock market.

There were people who were selling, but nobody was buying. It’s a supply‑and‑demand thing. When there’s too much supply, what happens to prices? They plummet. That’s what’s happening right now.

The bond market is a whole different animal. That was scary two weeks ago. We have to give the Federal Reserve a lot of credit. Boy, they came in and literally saved the day. The Federal Reserve is the lender of last resort. Really, that’s what the bond market’s all about.

Bonds are debt. That’s how governments finance themselves, corporations finance themselves, and people do. That’s what a mortgage is all about. If I buy a bond, I’m the lender. If I have a mortgage, I’m the borrower. That’s what the bond market is all about.

What happened in the bond market is there were people who were saying, “I need cash flow. I need some money for my company or for operations.” Nobody was lending it to them. The Federal Reserve looked at that. It was literally the Ice Age, right back, all over again, in the bond market a couple of weeks ago.

They learned from the Financial Crisis that they can’t fool around. They plowed a trillion dollars into the market. It’s functioning perfectly now. A few glitches here and there.

Gregg: That’s a great sign of what we’ve been talking about, which is, is what we’re seeing actually rational. You just explained it in a way that makes complete sense. I want to make a transition here and ask, “What is it that you’re hearing from your clients about the economy today?”

Patti: Gregg, they’re scared. Everybody is scared. Nobody really knows the implications of this. The problem is you can’t manage what you can’t measure. We can’t manage what’s happening in the world because we don’t know how far this is going to go, how many people are going to get sick, and the implications on the economy.

The question that everybody is pretty much asking me right now is “Am I going to be OK?” That’s really what people want to know. There’s no magic bullet here.

Put it this way, over 35 years I have learned that you don’t have to predict what’s going to happen to win this game. It’s not necessary. What is necessary is to understand where are we today and make really good decisions based on the information that we do have. It’s not going to be perfect, but it’s going to be perfect for you because it’s based on your personal situation.

I will tell you, Gregg, we go into every day. We’ve been prepared for this moment because it can happen at any time. It’s because I’ve lived through these things. It started in ‘87. Then we went through the tech bubble and the Financial Crisis. Nobody saw those things coming either.

As a financial planner, we go into every day understanding that the markets can plummet. Our clients are trusting us to make sure that if it does happen, they’re still going to be OK. To answer your question, our clients are just checking in and saying, “OK, Patti. Are we still OK?” My answer is yes because we’ve reserved for this.

Instead of going with Plan A, we’re going to go with Plan B. We have to adjust because things are different. Things have changed. We knew that they could. We’re ready. We just go to Plan B.

Gregg: Isn’t that part of why smart people create a financial plan in advance anyway?

Patti: I would hope so, put it that way.

Gregg: I was talking with…

Patti: I’m biased there, but yes, that’s the goal of a real financial plan. It’s not only if we continue doing everything we’re currently doing. What if this happened? What if that happened?

It’s not just what if markets crash. What if I lose my job? A lot of Americans are facing that today. You run that scenario. What if you lost your job? Would you be OK? What would you fall back on? Things of that. That’s where I think financial planning is so powerful.

Gregg: It seems to mean what you said, that obviously when you sit down with a client or anyone in whatever form they decide to do financial planning for themselves do it, you’re running scenarios in your head of the what‑ifs. As you said, what if I lose my job? What if this happens? What if that happens?

It’s not that you’re going to predict what might happen in those what‑if statements. It’s that you’ve planned for something to happen, whether it’s known or unknown. I never dreamed in my lifetime that we would voluntarily…I’m saying voluntarily. I’m not quite sure that’s the right word.

I never dreamed that a government would shut down its economy. I don’t know that many others thought about that either, which is part of the uncertainty of we don’t actually know how this plays out. Are we prepared for it? We have an awful lot of systems, as you’ve been describing, like with the Fed, that are designed to manage the unknown. In this case, what we’re looking at is the unknown.

Patti: It’s so true. Nobody could have anticipated literally a worldwide shutdown of life as we knew it. You’re right. It is a period of uncertainty, but there’s always uncertainty. The most important thing is to understand and to be humble enough.

I mean that from the bottom of my heart, to be humble enough to understand that there may be a period of time when we don’t know the answer right away and to have a scenario and know in advance what you’re going to do.

You mentioned me being a nurse. I really think it goes back to when I was an ICU nurse, Gregg. How often was I at the patient’s bedside? Everything was going hunky dory. I’m looking at their monitors.

I’m looking at all four lines, their CVP, all of the different ratios and things of that nature. Everything’s fine. Then all of a sudden, boom. They crash. We’ve got V‑tach or V‑fib or, worse yet, a flatline. All of a sudden, the crash cart comes in. We’re flooded with people trying to save this patient.

It’s exactly the same today. The most important thing is to know that it can happen every time and to have a protocol. What are we going to do? You don’t want to have to think through it while it’s happening. That’s when panic sets in. People do not make good decisions when they’re panicked.

Gregg: It’s one of the things that I imagine is happening with you, your team, and your relationships with your clients is that there’s a lot of questions coming up now that are not about the balance of the portfolio, but things related to the balance of the portfolio.

For instance, I was reading over the weekend an article in “The New York Times.” It’s actually, I think, an important enough article that I’m going to call it out. It’s what you should know before you need a ventilator.

I want to hear your take on this because of your experience in the ICU. I understood for the first time so many things about what happens if you need a ventilator that it made me hand the article to my wife on my phone.

When she was done reading it, I said, “I want to get it in writing that if I’m ever in a condition where they need to”…I think they call it intubate.

Patti: Yep, intubate.

Gregg: To put me on a ventilator. See how much I learned? “You have my permission not to do it, because I’m not sure the outcome is going to be worth it.” I imagine that many of your clients are now thinking about all kinds of aspects of their future.

Their health future, their financial future, their legacy, things like that. Are those the kinds of conversations you’re having with your clients as well?

Patti: Absolutely. Those are the questions that I’m encouraging with all of our clients. If I can just go to that article, Gregg, and maybe play devil’s advocate for you. I wouldn’t necessarily tell your wife not to let the doctors intubate you, because a ventilator is there to assist you with your breathing.

Isn’t it amazing that here we are an environment that’s something that we used to take so for granted, like breathing, now comes into question? We are worried about being able to breathe. Here’s the deal, a ventilator is intended to assist you, to allow your body to rest.

Breathing takes an incredible amount of energy. When you’re really, really sick, you don’t have the energy to do this thing that you and I are doing right now. That’s breathing. Here’s the thing about ventilators and being intubated.

It’s uncomfortable, so you need the medications. You need the relaxing, things of that nature. Also, what’s happening with this virus is that people are developing this thing called ARDS, acute respiratory distress syndrome.

That’s the scary part, because that’s hard to get out of. If you’re reading articles that say, “Be careful about intubated,” it’s because that a lot of people are developing ARDS. Guess what, Gregg? A lot of people aren’t. They’re getting off the ventilator.

By all means, don’t necessarily make a unilateral decision. You’ve got to rely on the medical professionals who are looking at your labs, looking at your ABGs. I won’t get overly technical.

They’re looking at your numbers and saying, “OK, we need to help Gregg out. This is temporary.” It’s like the stock market crashing. People want to sell their stocks right now, but I got to tell them, “Look, it’s temporary. We will get you through this. Don’t do anything rash as it relates to your portfolio.”

I would say to you, my friend, don’t do anything rash as it relates to whether or not you go on a ventilator. Let the medical experts make that decision based on the information they have and your condition at the time.

Gregg: I like how you related that. First of all, thank you for your advice and noted.

I’m going to have that follow‑up conversation with my wife about this. [laughs] I love how you related it, because we can all relate to the human body. It has a finite place in the world. I like how you related that to our finances and our wealth as well.

It actually makes me wonder, what’s this been like for you and your family?

Patti: Oh, thank you for asking. These are the times where it matters the most. My son just had a baby. The baby is a month old. Literally, they were down to one diaper yesterday, Gregg. They were told they cannot leave their home. This baby is too fragile.

I said, “I got you. Let me run out. I will go.” It took me two hours. This whole field that you are such a leader in, this service journalism, I think it’s so interesting. When would Patti Brennan ever have been watching a clip on how to disinfect groceries?

Yet I did over the weekend, and sure enough, I did the gloves. I did the mask. I went out, grabbed the diapers and a couple of other things for these kids.

Went over to their place and spent an hour disinfecting these groceries and said, “Look, here’s a couple of diapers. Let them sit out here with a Clorox on the outside. Let them sit out here for an hour or so, and then you can come out and get them.”

I didn’t see them. I waved to them. That was it. It’s just a whole different world, and that’s OK. The more education we can provide, the better, and the more perspective we can provide, the better.

I think that, to answer your question, it’s times like this when people will really step up. Hopefully, I’m stepping up for my family, my friends, my clients, and my team to be that person that they know they can count on, no matter what, whether it relates to their health decisions or their financial decisions.

Gregg: You said earlier that you were sure there would be some really good outcomes as a result of the coronavirus crisis. In a sense, you just pointed to some. Your own realization, I think, that in my normal life, I would not have been happy to go spend two hours to buy diapers.

I’m very happy to do it under these circumstances. What other kinds of good outcomes do you see for all of us, yourself included? How do you think life will change in ways that will enable us to look back on this and say, “Yes, it was horrible, but these great things came from it as well”?

Patti: I think there’s so many good things that are happening already, Gregg. This whole thing is changing the way people think about their money, and it’s changing the way they think about life, their family, and their friends.

It’s a beautiful thing to watch. Even within my own business, I have a small business. Let’s face it. I’ve got 25 full‑time employees. I will tell you that, when this thing first broke out, before it was really mainstream, I just told my whole team, “Look, stay home.

“We’ll all work from home. I’ll hook you up if you need printers, if you need monitors, if you need computers. You can work from home because your health and your family is more important to me than what you do for me and our clients.”

What’s really interesting about that is these 25 people have stepped up over, above, and beyond. They have reached out to every single one of our clients. They have done two cycles on our client portfolios.

They’re not working 9:00 to 5:00. I’m telling you, Gregg, they’re working 7:00 to 10:00. They’re doing it at different times of the day, which is perfectly fine, because they’ve got young children. That’s OK. I don’t care when stuff gets done. We just care that it does get done.

They’re being very creative in terms of how they’re approaching their day‑to‑day work lives. I think the other thing is that, for me, my heart is just so heartwarmed. You know me, Gregg. I’m a hugger. This is killing me right now.

What I’m learning is that you can give people hugs virtually. What’s amazing to me is I’ve talked to hundreds of people over the last three weeks, and I can’t tell you how — it sounds corny, but how — loved I feel.

Our clients, people are saying, “Patti, how are you doing? How are you holding up? We need you to be healthy. Are you OK?” People really care. The other thing is how grateful they are. It’s a wonderful opportunity to tell everybody in our lives.

What’s really cool is that we’re hearing it, too. “What a difference you’ve made in my life. Thank you for being in my life. You’ve made such a difference. Just knowing that you’re there makes all the difference in the world to me.”

We can say that to anybody. I can say that to you, Gregg. You’ve made a difference in my life already, because you’ve brought out and you’ve asked me questions that other people hadn’t asked yet. It’s really made me think.

We could talk about the economy. The economy’s going to be different. Again, different isn’t bad. It’s just different. We’re still going to be a service economy. We’re learning that we can do service from pretty much anywhere.

We can do it from our homes and do it quite effectively. We’re learning that maybe we should be doing more things like manufacturing here in the United States. Maybe we shouldn’t do this real‑time, just real‑time demand type of economy, where you keep supplies very low. Maybe that’s not OK.

What I think is also neat is what it’s bringing out in terms of creativity, in terms of innovation, collaboration, cooperation. I think it’s pretty cool that China’s sending ventilators to the United States.

Yeah, we might be mad at them for some reasons and vice‑versa, but at least the world is trying to come together to fight this enemy, this virus that is one‑tenth the size of a bacteria. It’s a very small, little organism, and look at the havoc that it is wreaking in the world.

We’re all fighting against the same enemy. I think that’s a wonderful thing.

Gregg: It completely changes one’s view of what’s happening. I think, for most of us, we look out the window or look on the Internet, and what we see is a lot of information that confirms our greatest fears.

What you’re suggesting is…In fact, I’m realizing you sent a newsletter out, and I’m going to quote it, because I was so struck by something you wrote there.

Patti: Uh‑oh. What did I say?

Gregg: No, it’s great. You said, “Remember, you can’t have courage without fear. It’s OK to feel that.” Even the human side of our relationships, sometimes – maybe not for you, Patti Brennan but for many of us – it’s scary to tell someone that they’re important to us.

What you just said is perhaps they’ll find the courage to have more of those conversations because of the coronavirus, and that may change our lives forever. It might not have ever happened had the coronavirus never happened.

Patti: Can you image what that would be like if everybody just felt the fear, felt uncomfortable, whatever it might, and looked into the eyes of another human being and said, “You’ve made a difference in my life. Thank you for being in it. I love you.”

Can you imagine what that would do? We’re all better of the people who surround us. We are all better. We’re changed forever by the people that we know and the people that we meet. We can have an impact on everyone around us.

Let’s just embrace that for a moment and think about how can we use this terrible time to influence people in a positive way.

I always talk to my team. I say, “Our role in our clients lives is to influence them with integrity.” We never know for sure exactly what’s going to be the right thing to do.

We use our very best judgment and understand that they’re counting on us to exercise that judgment that is in their best interests, whether it be for cash flow decisions or how to put my kids through college or how, given everything that’s going on in the world, can I afford to do this.

By the way, Gregg, like we were talking last week when we were on the phone, when I was a nurse, when I was sitting at the patient’s bedside, I wasn’t just holding their hands. Yes, we do that. Yes, we explain. Yes, we comfort. You know what we do even more? We act. It’s like the doctors are the architects. The nurses are the builders.

They come up with the plans, frankly a lot with the nurses’ input. It’s up to the nurse to execute, to make it happen. One of the things that I think is important and maybe the subject of another conversation with you is what should people be thinking about right now, what are the action items that they should be considering.

We won’t go into it right now, but it is important to really step back and say, “OK, should I be taking the required minimum distributions if I don’t have to? Should I be filing my taxes right now, or should I wait? Should I be making those IRA contributions now? What about a Roth contribution? The market’s way, way down. Isn’t that a good time to do a Roth conversion?”

Well, maybe, maybe not because under the new law, you can’t recharacterize it. You can’t take a mulligan. That really should be a much more thoughtful and deeper dive because it could expose other income to taxes when it wouldn’t have been subject to taxes. This year, tax planning, Gregg, is going to be amazing.

I’m so excited. The nerd in me is coming out right now. There is so much tax planning and really fun stuff where people can save a ton of money. I’m not kidding you. A ton of money. It just has to be thoughtful. We’ve got 10 things, action items, that everybody in my team is talking to our clients about right now, today.

Gregg: As much as people hate the coronavirus [laughs] , they do love to save on their taxes. You’re saying that because of the coronavirus, there may be some really powerful, effective ways to save on your taxes. Not that you would wish for one and be willing to accept the other, but the other is here. We can’t do anything about it. As you said, let’s make the best of it.

Patti: You know what? It’s here. It happened. What are we going to do about it? We look at it on an individual basis. It’s interesting. It’s very important for all of us to recognize that things are going to be different.

One of the things that’s going to be different is taxes are probably going to go up. They have to. We’re going to have to pay for all of this relief that the government is providing. It is important. They need to do this. Again, I keep on talking about future podcasts. This is what you and I do, Gregg.

There’s so much to talk about. One of the things is aren’t we going into a depression. They’re talking about unemployment rate of 34 percent. During the Depression, unemployment got up to 25 percent. Whoa.

Doesn’t that mean that we’re going to go into a depression? With the stock market crashing, it’s going to crash even further. I do not believe that we will ever go into another depression. We can talk about that at another time.

Gregg: Can I make a suggestion? There’s many things here we could talk about. Could I suggest that we do a follow‑up conversation specifically to talk about whether we’re going to have a depression or not?

Patti: OK. You’re on. I will do that. I will commit to that. I agree with you. It’s important for people to know.

Gregg: I actually want to wrap this up with a thought. I want to get your take on it, both as someone who was once a nurse in the ICU, today the President and CEO of Key Financial. That is I’ve always thought that perhaps one of the functions of death is to remind those who are left the importance of living.

I wonder if you think that’s a suitable analogy for the economy as well. The economy is not going to die. We just said we’re going to have a follow‑up conversation about whether we’re going to go into a depression or not. The economy is not going to die. In the same way that I think death reminds people to live, when you watch someone go through a near‑death experience, it also reminds you to live.

Do you think that one of the good outcomes of this is that people will begin to look at the economy and their lives in relationship to the economy and their lives in relationship to their wealth with fresh eyes and perhaps really be reborn financially and with respect to their relationship with wealth?

Patti: Boy, what a powerful statement that is. You’re absolutely right. I do believe it is going to make people think differently about their wealth, think differently about their money. At the end of the day, when you look at a portfolio it’s just shares. It’s just values of companies in America and the world. It is just a bond. You’ve lent somebody money. They’re going to pay you some interest.

At the end of the day, values can fluctuate. Does it change your life? No. The fluctuation isn’t going to change your life unless you do something to realize that loss.

Gregg: Maybe it does change your life because of the values that are driving it, the why, what’s it for. I’m creating this wealth because I have a grand vision for how I’m going to use it. That could change my life and the lives of many others.

Patti: Absolutely. Wait till you see what this is going to bring out in terms of people’s generosity. You’re seeing it already. People are making donations to the hospitals. People are helping others.

There’s an amazing commercial. I’m just going to call it. Literally, it’s by Walmart. It was on last night. Ed and I were just mesmerized by this commercial. It was a beautiful commercial about Americans coming together. We’re going to see more of that. People are going to view their wealth as a means.

This is the way it always should have been viewed, as a means for their own security, their peace of mind, but it has also got incredible legacy implications in terms of what can we do with what we’ve accumulated to make a difference in the lives of other people. That is a beautiful thing.

Gregg: I can’t think of a [laughs] better place to end this, Patti. Thank you so much for inviting me to come on your show and interview you. It’s really been a pleasure. It’s been an honor.

Patti: Gregg, thank you so much for taking the time. Talk about honors, it’s amazing. I am nothing close to the people that you normally interview. What a privilege it is to have you today. Thanks to all of you who are listening. These are really difficult times. I know that you could be watching or listening to something else, but you chose to be with us today.

I hope you found this to be a good use of your time. We are going to do more of this. Gregg and I are going to reconnect. We’re going to talk about why I don’t believe we’re ever going to go into a depression. I’m going to list the reasons rationally why.

In the meantime, if you have any questions feel free to go to our website. It’s at keyfinancialinc.com. Leave us a message. Ask a question. Call us. We’re here to serve you. Thanks to Gregg Stebben, today we’ve been able to do that.

Gregg: Thank you, Patti.

Patti: Have a great day.

Ep40: America’s Student Loan Crisis

About This Episode

At the release of this episode, America has entered its first bear market in over a decade. Investors all over the country are watching the market volatility and choosing their next moves very carefully – hopefully under the guidance of a seasoned financial advisor. But at the same time, life continues to go on and college seniors are set to start graduating in a month and high school seniors have their eyes set on starting their collegiate adventure in the Fall. An overarching fact over all of this is, as many of our college seniors graduate, they will be entering into the reality of paying back loans that have now totaled $1.6 TRILLION in the U.S. In part one of a two-part series, Patti sits down with Peter Sims, the President of PayForEd, a software company that specializes in developing strategies for setting up and paying back student loan debt. They discuss how the student loan crisis got to this point and what steps students and their parents should be taking now to minimize their risk.


Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Hey, whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me today is Peter Sims. Peter is the president of PayForEd.

Today we’re going to be talking about the student loan crisis, and how we as American parents can look at this question of putting our kids through college, and what is the most cost‑effective way of financing that. Peter, welcome to the show.

Peter Sims: Thank you for having me.

Patti: Thank you so much for coming today. It seems like every other day I see a new headline about the student loan crisis. While we have boots on the ground and we see it every day, is this thing overblown?

Peter: Patti, I asked myself the same question when I entered into this field a couple of years ago, from being in the financial services for 30 years. Is it really a crisis? Not only is it a tremendous crisis right now, but it’s growing. Currently it’s $1.6 trillion. If I go back to 2005, we were a little over 500 billion.

Patti: I was going to say. That is really fast. The last time I looked at it, it was $1.2. It’s $1.6 now?

Peter: $1.6 trillion, and it’s affecting nearly 50 million people. What the scary thing about it for me is, we’ve got 59 million people in secondary and educational schools. That’s going to keep on growing.

Patti: Oh brother. It’s getting worse before it’s getting better?

Peter: Correct.

Patti: And you know, folks, this is a really important issue because here we are in an election year. As we all know the candidates are talking about it – it’s really a popular topic. Rightfully so because it’s affecting so many people. It’s really good to have you here today, Peter, because I think that your company focuses on the solutions.

Peter: Correct, and Patti, you made a great point. There’s over 137 different forms of legislation mentioning student loans, student loan repayment, sitting in the legislative bodies as we speak. As we’re going through them, it could be added on, but it is a complex situation that we need to find a solution for.

I think that it’s not only a solution for the current debt, but we’ve got to start preventing it. If you think about a medical situation, yes, you want to cure the current epidemic that’s out there, but don’t we want to prevent it?

Patti: Yeah, absolutely.

Peter: That’s where we come in.

Patti: What I thought was interesting as I was doing the research today for the show, I was really fascinated at some of the statistics out there as it relates to graduation rates.

I have four kids Peter, and I know that you have…How many kids do you have?

Peter: I have four.

Patti: We’re eight between the two of us.

Wow. We are totally contributing to this crisis. I can tell you, when the Brennan household and the Sims household…what I thought was fascinating was that the graduation rates aren’t what you read about in the glossy brochures or the dog and pony shows that they put parents through when you’re taking the kids around at different schools.

Peter: It is absolutely mind‑blowing at this point of time. If you look at the four‑year schools, the graduation rates are less than 40 percent in four years. You’re also talking about graduation rates of less than 60 percent in six years. Here’s where it becomes extremely troubling for me. Transfer rates are around 35 percent.

Patti: Now, why is that?

Peter: When people first go into a university or a college, and you saw that glossy brochure that you looked at, it is a wonderful choice. Think about it from a parent’s standpoint, it’s emotional.

You’re so glad that your child is going but what you didn’t really think about is how are you going to fund year two, three, and four? Financial situations end up being a large part of the transfer process.

Also, the way kids are looking at schools these days. Years and decades, and decades ago, we visited schools, then apply. Now, it’s reverse. People apply and then go visit the schools that they’ve done a research on. Not knowing the school, not knowing the financial aspect, or the outcomes of your decision, leads to the transfer rates.

In addition, too, you’ll also have people changing majors at a more rapid pace than ever before. I saw a recent statistic last week, that 50 percent of the students are changing majors at one point in their educational journey.

If you really look at the statistics — I was on a conference call last night – that applications are up, and admissions are down. That’s one of the reasons why we see the tuitions increasing at the rate that they are. College tuition, believe it or not, is up 1,400 percent since 1978.

Patti: Wow.

Peter: That’s four times more than inflation.

Patti: The graduation rate is really an important thing that we all have to keep in mind. I told my kids…My oldest took longer than four years to go through school.

The other three, I said, “OK, here’s the scoop. We’ll help you the first four years, after that you’re on your own.” You know what happened? All three graduated in four years.

Isn’t that interesting? You know what? You also think about the universities, it’s a business, right?

Peter: It is absolutely a business.

Patti: Their job is to get students, put students in seats and keep them there.

Peter: Yes.

Patti: They want to keep them there for that fifth and sixth year.

Peter: It’s not hurting them at all for that person to come in, in particular, the people that are, say, full pays, or the people that are funding their education through loans. Getting a loan is quite easy to do in the federal system itself.

Patti: Is that why you think the crisis is growing so quickly because it’s so easy to get these loans?

Peter: I think that’s absolutely one of the reasons. We talked about one, is that the tuitions are increasing very rapidly. We see people staying in school much longer. Now it’s the access to capital through the federal government which makes it easier to pay for those additional years. It’s adding on.

If you really look at it too, the way in which the loan structure is out there, it’s complex, and people understand it. If you don’t understand it, you just push it off to the side.

I always say that what we have to stop is the current strategy of hope. Hope has been the strategy [laughs] for many, many parents that are out there, “We’ll figure it out later.” Well, later is now because it’s affecting yourself. It could be affecting the parents, the grandparents, and most importantly, the students.

Patti: Absolutely. You think about the domino effect of kids graduating with $50,000, $100,000 of student loan debt. As we really think through this, and you and I both know, that has had an incredible economic effect on our country.

You think about the last 10 years and the slow growth of economy that we’ve experienced. You wonder, did one cause the other, or is one a contributing factor?

These kids are graduating with six‑figure loans. They often then put off decisions that you and I might have made, getting married, buying their first home, having children. That has a trickle‑down effect, doesn’t it?

Peter: It absolutely does. If you are thinking about the direct economic impact, think about student loans. It’s growing faster than credit card debt, mortgage debt, and most of the debt that’s out there.

You mentioned some of the situations. You graduate with 30, 40, 50 thousand dollars’ worth of loan. You’re not able to put money away for a house so that affects the housing market. The housing market is cyclical in which people buy and sell houses. If you take buyers out of the marketplace, that affects it.

You talk about the situation where the entrepreneurship. If you’ve got $50,000 worth of loans, how are you going to start your own business? America was built on small business owners, so we’re taking that out of the factor.

We also have the next scenario of retirement. What I mean by that is, say a parent is taking money out of their retirement plan to pay for education…

Patti: A big no‑no, folks.

Peter: Big, big no‑no. All of a sudden, they’ve got to stay and work for an additional two, three, four years.

How does that affect the economy? It affects the economy in one way, directly is that the company now is going to have to pay healthcare benefits for an older person which is going to affect their bottom line, which is going to affect their staffing and the way in which they grow their business.

Little decisions are affecting the economy across the board. It is truly amazing how much of an impact that we’re seeing now, and that more importantly, we’re going to see in the next 10 years.

Patti: When you really think about it, think about that older worker staying in that job, and we’ve got these kids that are graduating from college, and they’re not getting promoted because guess what? The opportunities for growth within the organization aren’t there because people are staying longer.

Peter: Very, very true. That means what? They job hop. The average person stays in the job less than three years now. It’s probably close to 2.3, 2.4 years. How does the company invest in someone that’s only going to be around so long? That affects the productivity of the company. Where are we going to be?

Patti: Exactly. What about graduate school? I have a lot of friends who are physicians, attorneys, etc., and they’re graduating with a debt of $200,000. Especially in the physician market, a lot of physicians aren’t going into private practice anymore.

Their incomes are limited. They’re being employed by hospitals. It’s a wonderful opportunity and they’re doing their life’s vocation, but they’ve got this thing hanging over their head. It’s a very different professional career path than it used to be.

Peter: Patti, that scares me the most. Three reasons, why. One, more and more companies are requiring a graduate school degree to move forward in their companies, which is in the business world, a growing situation. You think about medical school, doctors, teachers, education, in your master’s degree at that point of time. That is only going to keep on increasing the debt.

However, you’ve mentioned numbers of 200,000. I had a conversation with someone in Philadelphia recently, that the average debt coming out of some medical schools is much more north of that, $300,000. Does that deter a qualified candidate becoming a doctor? Think about where we are as a nation if we lose our doctors and our teachers.

Two areas that need a graduate degree, it’s becoming much more expensive. Even on the loan front, graduate school loans cost about 500 basis points or five percent, more than undergraduate loans.

Patti: I didn’t realize that. Wow.

Peter: As a strategy, some people say, “Well, we’ll pay for undergraduate and graduate school is on you.” You might want to rethink that strategy with your advisor, because it’s much more expensive to borrow money later on.

Patti: Very interesting. It’s this whole thing. It’s a web of complexity. You’ve got all the different loan programs, whether Parent Plus, Stafford, all of these different programs. I will tell you because I have your software, thank goodness, because your software helps us to really differentiate and optimize this whole question of how do we finance the education of our family?

You go into that and let’s talk about the different types of loans. Let’s break it down, Peter, between the federal loan programs and private loans. What’s the difference between the two?

Peter: From a basic standpoint, the federal loans are issued by the government themselves, private loans or private sector loans that are there. There’s three main differences that are out there. One would be the interest rate. Private loans, sometimes you qualify for a lower interest rate depending upon your creditworthiness.

The second factor is the amount of money that you can get on a private loan can be higher than a federal‑government loan. The biggest difference is the flexibility. Flexibility of the federal loan is much better. If you T‑charted it, it really depends upon your situation and that’s one of the solution is.

Too many people talk about generalities, in regards their college planning, funding, and student‑loan repayment. You have to take the approach of, it has to be customized towards yourself.

We’ll go back to our other comment that you made, people going into different schools. If I’m in the same situation or my child’s in the same situation as my neighbor, and they got into ABC school that’s out there. My child’s going to get in. No, it’s much different depending upon your situation and what the school wants.

My biggest suggestion to everyone out there, is you need a customized solution to make the right educated decision.

Patti: That’s what real financial planning is all about, customized solutions that are geared towards the needs of the family. We’re not necessarily looking at things, in this silo of college education. How does the college education decision affect other areas of a family’s financial life? It really has to be holistic.

Here’s a question for you. I’m going to tell you what a parent said to me recently. We were talking in the conference room, and he referred to college these days as adult daycare. It begs the question, is college still worth it?

Peter: Yes, it is. From a basic fact people make twice as much money. A recent study that came out, twice as much money of a lifetime having a college degree, than a high‑school degree and more money as a graduate degree. What you do with that degree is another different story at this point of time.

Is education worth it? Absolutely. Is the daycare comment warranted? Yes. It’s in association with five, six, seven, eight years of education. I know a good friend of mine took his decade‑long educational route, but that could be qualified as daycare.

I personally believe that all parents should think about the fact of taking out a federal Stafford Loan, for the mere fact, that their skin in the game for the student themselves. If they have the assets to pay, put that into a plan. When they graduate in four years, pay off the loan.

If they have the knowledge that, that loan is on them, it might take away a little bit of that daycare scenario.

Patti: Absolutely. It is an important point that you bring up, because when they do have skin in the game, they do understand they’re involved in the process. We sit down with these families and the kids to talk about the different alternatives and give them real numbers and what it’s going to mean for them, once they graduate.

If you go to this school, here’s the financial ramification. If you go to school B, here’s the ramification. One campus might be more beautiful than the other. Ultimately, what do you think you really want to do? Does the college provide a good depth and breadth of alternatives?

We don’t necessarily want to encourage the kids to, as Peter Sims says, make your own major. I want to take a little bit of this, a little bit of that. At the same point, we also want to recognize that a lot of kids don’t know what they really want to do.

I remember having a conversation with my daughter when she was a sophomore in college and I had, we call, the “deep and real.” We’re having a deep and real and to Carrie, I said, “You know, Carrie, communication, tell me what that means to you? What do you see yourself really doing with that? By the way, if money wasn’t an object, what do you really want to do in your adult life?”

That was an amazing conversation. It opened up a wonderful thought process for her. She’s up in Brooklyn, New York now acting. Who would have thought? It’s very interesting because that degree in communication was focused on writing skills. She’s written an entire movie, she’s producing it, she’s directing it, she’s starring in it.

Talk about communication. You can’t get much better than that, right?

Peter: Absolutely.

Patti: It’s a very interesting thing, in terms of, having that conversation with our kids. It’s not only about the money, but what they see themselves doing and what their unique gifts are.

Peter: Patti, first of all, thank you for doing that with your clients. There’s not many people across the country, who are advisors, that do that. They have to do that.

One of the most effective questions that I’ve ever seen an advisor ask, “Why? Why do you want to go to school?” That starts narrowing down the situation, not if you’re going to go south, north, west. Why do you want to go to school?

I do believe advisors need to help families start getting a path of that university. The idea of trying to figure it out when you’re in school, that might be OK, when school costs about $5,000. Now we’re talking about quarter of a million, half a million, a million. That’s a lot of money to try to figure something out.

Advisors need to be that third party in helping the families understand, what you said, financial outcome.

Patti: It’s OK also, not to go to that four‑year college down south, or across the country. It’s OK to go to a community college or, better yet, a trade school.

I will tell you Peter and folks in the audience. I will tell you with all of my kids, especially my daughters, I said “You know what you don’t have to go to college. Yes, I want you to get a college degree eventually. There is nothing wrong with trade school, go be a plumber.”

Can you imagine a young woman showing up at your front door to help you with your plumbing? They’d kill it.

Peter: Patti, my guys, I have four. I’ve got a 17, 15, 13, and 11‑year old. When I think about the future of education, I also think about the society we’ve grown up in. I’ve got three boys and a girl. I came from a very large family of seven children. We were kicked out of the house, and we actually, believe it or not, rang a bell to come home for dinner at that point.

Today’s society is so structured. Think about athletics. They’re structured, there’s not very many pickup games. The reason why I mentioned that is that they haven’t been able to explore their own individuality. When you mentioned community college, that’s the first step in adulthood without sending someone off at that point of time. I’m a big believer in the future of 2+2+2.

Patti: I love that. You told me about this, Peter. I think it could go viral.

Peter: Two years of community college to make a better understanding of what you want to focus on, but not taking the financial repercussions of some other decision that you make. Two years to really focus upon what your major is going to be, and then the advanced degree in grad school.

I think if you take a mature approach in looking at what you really want to do, that’s an excellent solution. I’m sure if my 17‑year‑old hears me say this, he might not be happy with me. That’s the discussion that need to happen. I think that more people need to help families, advise them on the financial situation. You’ve gone through it. I’m going through it. Making that choice for college is emotional.

Patti: So emotional.

Peter: I’ve heard you talk about, what’s the problem with making an emotional decision with your investing?

Patti: Yeah. It’s a loser’s game. It creates impulsive decisions that often people look back and say, “Why did I do that?” There’s a lot of remorse with that. Unfortunately, with this, it follows these kids and these parents for years. 10 years, 15 years, this debt is hanging over their heads. I think it’s even worse because a lot of kids are graduating and they’re underemployed.

Peter: Yes.

Patti: They’re not even earning the income to be able to manage it.

Peter: No. It becomes very, very…not only financially it’s a hardship, but it’s also emotionally discouraging to them. That’s a repercussion fact down there, at that point of time. Having a third party or second opinion come into the conversation is much more powerful.

Advisors need to understand educational planning like you do. It’s just like retirement planning, if you come down to the basics, accumulation, and distribution, and then maybe legacy. It’s the same thing with educational planning. There’s accumulation, distribution, and maybe legacy, if there’s a 529 moving on at that point of time.

However, one of the things that I’m asking people to think about when they’re talking to their clients, is you need to break down that stigma that if you have debt you’ve failed. Hey, at this point, if you looked at a college cost analyzer…and I’ll use just basic data. $2,500 goes into an account, you put $250 away a month, at an eight percent rate of return historically.

You might think as one child, you funded an education for your child. You might have funded maybe a third of it, or a quarter of it. It’s not a matter of saying, “OK. Am I going to have to take debt?” It’s, how do you want your financials to be structured? Start planning for it now.

Patti: How does your company, how does PayForEd help people, help parents, or advisors, or even companies help their employees, for example, manage the debt that they might have accumulated? Tell us more about that.

Peter: In a simple way, we provide transparency and simplicity to a complex process. We give you the information and education that you need to make decisions. What does that mean? I always use a simple term. Think about TurboTax. TurboTax for education student loan planning.

You put your input in, but it’s customized to you, and it gives you a strategy at the end on how to pay for it. We help people make these simple decisions that they might not have access to right now. It’s very difficult to get the information you need because there’s so many different parts that you’re pulling on, and then it becomes overwhelming. What happens? You don’t do anything.

Patti: Isn’t it true? I think you told me there are 128 ways to pay back a student loan.

Peter: If there’s a married couple and both have student loans, and they’re entering the workforce, there’s 126 different options you can choose from.

Patti: OK. OK, I overstated by two. Isn’t it amazing?

Peter: Hey, listen, we could be at 130 by the time this legislation gets done.

Patti: Yeah, yeah, yeah. Wow. It is amazing.

I will tell you, as the owner of your software, thank you so much. It does break it down and make it so easy for us to look at the options and optimize it for each individual family.

It’s a great, great tool. Peter Sims, I could be here all day talking with you. You’re so much fun with not so fun topic, by the way.

Peter: [laughs]

Patti: I got good news for everybody listening, we’re bringing him back. Stay tuned, because in the next episode Peter’s going to join me again.

We’re going to break down the tools available to get the real skinny on graduation rates. We’re going to be looking at the different universities, public university versus private.

It’s not always what you see. It’s not always what’s on the piece of paper.

Peter’s going to walk us through the FAFSA form. What does that really mean? Who should be filling it out? Should you bother, etc.?

It’s going to be a great, great show. Please join us for the next episode.

In the meantime, Peter Sims, I can’t thank you enough for being with us today. Thank you for your input, your wisdom, everything that you’re doing.

I know you’re doing some work down in Washington. Oh boy, help us solve this crisis, Peter.

Peter: Thank you so much for having me. I look forward to coming back.

Patti: Thank you. To all of you, thank you so much for joining us today.

If you have any questions, if you would like to learn more about the student loan crisis or how you can apply what you’ve learned today, and the tools that Peter and I are talking about, go to the website, put in a question or give us a call.

We’re here to help you. Until next time, I’m Patti Brennan. I hope you have a wonderful day.

Ep39: Coronavirus Correction

About This Episode

As of the taping of this episode, the market is down 17% and the Coronavirus has put a scare into almost everyone! What will the impact of a 20% drop in oil prices have on world economies? Patti addresses these very hot topics with her Chief Investment Officer, Brad Everett. They discuss the cause and effect of this week’s market reaction and how investors should be making decisions on their portfolios. History will reveal some answers, but investors will still need to take a hard look at some opportunities that are now arising. Patti and Brad explain what those are and what the proper course of action should be.


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is Brad Everett. Brad is Key Financial’s Chief Investment Officer, and today we are going to be talking about the coronavirus correction.

Folks, we are in a correction. It’s happening right before our very eyes, and because of that, we’re going to fast track this podcast, so that you get the information in a timely manner and understand the impact that it might have on your portfolio, as well, as your overall financial plan. Brad, welcome to the show.

Brad Everett: Thanks, Patti.

Patti: What are we doing? What are we thinking, and, frankly, what are we doing about it?

Brad: I think in reality, we probably have no idea what we’re doing. Every time a virus comes along, it’s a new strain. It’s a new strand. You start from scratch with a vaccine, and you see how it goes.

There’s patterns from past viruses and past pandemics that you can hope work out the same way or even easier, but you just never know for sure. The market hates uncertainty.

Patti: That is for sure. As you know, I was traveling last month in Australia and New Zealand, and it was very interesting in those conversations I was having overseas. They said the virus probably didn’t really cause all this. It was just the spark that lit the fire.

I thought it was an appropriate metaphor, considering I was in Australia, and there was a lot of dry timber around. They hadn’t cleared out the timber, and in using that as a metaphor, the dry timber for our markets was the valuations.

We were getting pricy when it comes to price‑earnings multiples and valuations, so that’s the dry timber, you get any little bit of uncertainty that’s going to throw that spark, and voila.

Brad: Right. I always think correction is such a funny word. That infers the market wasn’t correct before, and after it’s fallen, it’s now correct. We don’t call it a correction when it goes up 10 percent, only when it goes down.

In this case, you could argue that if we’re in the middle of a momentum market, everybody was just afraid of missing out on more equity returns than maybe we have return now, whatever the reason. It just happened to be the coronavirus that gave us a little bit of doubt, and now we’ve returned to some kind of normal overall equity valuation.

Patti: That’s a really good point because we definitely saw the impact of last year’s rise in the market, and people were feeling a little left out. Even though a balanced portfolio created a really nice double‑digit return, there were some people who had been worried, moved into cash, and felt really bad that they didn’t get to participate in last year’s market.

Fast forward, here we are. You look at the multiples, and multiples are really about average, in long‑term average for price‑earnings results, so is it a correction or is it more of a normalization?

The real question and the uncertainty that we’re seeing today with the 1,700‑point drop in the Dow and S&P is way down, etc., is, that whole formula is based on earnings. What’s going to happen with earnings, going forward?

Brad: Sure. I think in reality, today, the coronavirus has taken a real back seat in the news to dropping oil prices, and maybe things that have a little more direct consequence on the economy that we can measure a little better.

Patti: Let’s talk about that a little bit, Brad, because everybody has their opinion in terms of the virus, and how long this is going to last, and is it going to be a multiyear issue for us, or how quickly can we get a vaccine? I thought it was interesting to hear that the composition of this particular virus is very similar to SARS. What is it, 86 percent?

Brad: Yeah, that’s the stat I saw. It’s genetically 86 percent the exact same thing as SARS. I think you would hopefully argue that researchers have quite a head start on this one, so hopefully it won’t take so long.

Patti: We had a vaccine for SARS, right? There was a vaccine that was developed. It was never used though, right?

Brad: Never needed. It ran its course, and before it was…I think part of the timing, you could have a vaccine tomorrow, but then by the time you give it the requisite number of testing and figure out a way to make 50 million doses, it takes some time.

Patti: Yeah. Look at the problem we’re having with getting the testing kits, right? It’s just there’s a delay of even determining exactly who is actually infected. We look at the statistics, and it’s scary. I think that David Kelly actually had a webinar this morning, and he said this is not like the normal flu. It is more virulent.

At least as we look at the statistics as they are today, I think it can be argued that, can we really depend on what China is coming out with in term of their data? He mentioned that maybe that looking at Italy and South Korea would be a more reliable, credible source to determine just how virulent this thing really is.

Brad: Yeah, there’s plenty of ways to manipulate the stats. I think that people that we know would argue against overthinking the coronavirus, would say many more people die from the flu, so this is not that big of a deal. Many more people die from car accidents, and homicides, and heart disease, and everything else.

It’s how fast is it spreading? How contagious is it and what is the mortality rate once you have it? I think those are important numbers that, technically last week…It’s horrible if anybody dies from it, but in the grand scheme of things, probably a low total number of people.

The question is, how fast does it spread? How easy is it to give it to someone else, and what’s the risk to that person once they have it? I think they’re all important things to think about.

Patti: Equally as important is, what are people doing in their lives? Are people hunkering down and staying at home, and what’s happening in places like China? While I was overseas, I thought it was interesting to learn about the metrics that many of the money managers are using to determine whether or not there’s actual economic activity in China.

They were looking at satellites, at traffic patterns in different cities. They were looking at the pollution index. I thought it was fascinating that the pollution index in China has plummeted because factories are offline.

It is interesting, some of the things that they have to look at to get the real story out of China, because they don’t really feel like they are getting it from their government.

Brad: They had to do their own research.

Patti: Italy and South Korea, though, are far more transparent. Northern Italy is really getting hit hard, and I think that for us here in the United States, some of the measures, to your point, they’re not kidding around here in the United States. I think South by Southwest was canceled. A lot of things are being canceled. Most corporations are saying no international travel.

Brad: It’s spring training time in Florida for baseball, and baseball players are pre‑signing baseballs to be handed out or thrown out, rather than standing in front of the crowd live‑signing balls. It’s all done ahead of time so they can just be handed out to fans and…

Patti: It always ends. Let’s go back to the timber. We were talking about the timber. This is the spark. What else is going on? You mentioned oil, and I think that’s really important for our listeners to understand that the impact of a 20 percent drop in oil prices in one day.

Saudi Arabia is, let’s use the word exploiting what’s happening in the world, because they’re ramping up supplies significantly. They are cutting prices. They’re offering a 21 percent discount on the price of oil to their trading partners with the goal, Brad, fill in the blank.

Brad: I think what happened is, they learned about how Wawa came to dominance in Pennsylvania by opening a store, charging very low prices for sandwiches and gas until all your competitors are gone, and then you raise prices back up to above where they were before. Saudi Arabia heard about Wawa, and they’re trying to copy the same business model.

If you have at the same time that production is spiking, and you are offering incredible discounts on the supply that you’re already are selling to preferred trading partners.

A barrel of oil is down in the 30s again, and you think of all the research and development that companies in the United States have spent to get oil out of the ground. Those are very long‑term projects. You lease an area under the ground or you own the area under the ground, and it takes a long time to get enough oil out.

You have to have some kind of projected price to make that project profitable, and if oil is down, I’ve heard numbers that say that Exxon Mobile needs oil at $75 a barrel to have any kind of free cash flow at all. Maybe Exxon has the balance sheet to withstand this, but there’s a lot of small upstream companies that will not be able to withstand this.

Patti: Let’s take that one step further. What is the problem with lower oil prices? What’s the big deal? We see it at the pump, that means that I could fill up my tank for a lot less money. That gives me excess cash flow, theoretically, I can go out and spend it, but people are very worried about the impact of these lower oil process. How come?

Brad: You try to think of it as like a zero‑sum game, right? If every time you fill up the tank, you save three bucks. That’s fine, multiplied across whatever, 130 million drivers in the United States, or whatever the number is.

The other side of that is, any of those companies that shut down are laying people off. You might save three bucks, but they lost their entire income. Unemployment creeps up. Everything is zero‑sum, the sum of all our savings equals somebody’s loss. That’s the risk, I would think.

Patti: It goes back to, we’re confusing correlation with causation. The virus didn’t really cause this. There may be some sort of a domino effect that occurs here, and definitely certain industries are going to be affected.

The airline industry is feeling it. Certainly the cruise lines, when leaders of our country come out and say, “Don’t go on a cruise,” wow, that’s going to hurt your business. It’s definitely going to hit pockets of the markets.

Brad: Banks, you mentioned.

Patti: Banking industry, you get to these very, very low, literally record low interest rates. The 10‑year bond today is trading at about a half a percent. We’ve never been that low. Is that unbelievable?

If you could panic about anything folks, panic about refinancing your mortgage. Panic about looking at your loans and saying, “Gee, what can I do to cut my payments?” because now’s the time to do it.

Brad: Where’s the opportunity for you as a family, or a household, or a person.

Patti: Exactly. Looking at these things holistically and figuring out, “OK, this is going to be tough.” It could be tough. We don’t know. Most people don’t really expect a V recovery, meaning this thing is going to bounce back.

Last week was tremendously volatile, with down days over 1,000 points, up days of 1,300 points. That kind of volatility is crazy in terms of how to figure it out. By the end of the week, the market ended up flat for the week. During times like this, you do not want to play in that sandbox. It is dangerous.

Most of you listening, you’ve heard this before. You’ve got a long‑term plan. Chances are, hopefully, you’ve followed the prescription of, make sure you have plenty of short‑term bonds, cash, money that will get you through the next two years, three years.

I don’t know that this is going to last that long, but if you don’t need that kind of buffer, it might be a great opportunity to get some of that money working, the old buy low phenomenon. As long as you don’t need the money for a period of time, you would probably look back at this period of time and say, “Wow, I’m really glad I did that.”

Keep an even temperament about this. If it really worries you, I’m going to pull out the nursing jargon that I use, go into the coma. Do the coma thing.

I think that if you do so, when you wake up, you’re going to be happy that, A, you didn’t’ sell anything, because I do think that you’ll regret that, and B, if you or your adviser were able to take advantage of this because you had that buffer, I think, that you’re actually going to wake up quite happy.

Let’s talk about the economy, because we’re looking holistically. Think about people listening. Should they be worried about their jobs, for example?

Brad: It never really is that smooth. I think there is certain industries that would suffer more than others. Energy, I think, as we discussed, is…

Patti: Vulnerable.

Brad: It’s going to be a little scary there, but even in that, it’s not so cut and dry. What are the companies that have the balance sheets to withstand it? It could affect anybody.

You could work at a mall and you could work for a store, that if people are afraid to go to the mall, you might have a rough go of it. Even at the mall, some businesses are barely getting by, and other ones cannot make money for years and still stay in business.

Patti: That was happening already, so it doesn’t necessarily mean that this whole situation is causing that.

I think the other thing to keep in mind is that for many companies, for many industries, they were having trouble finding workers. If you’re already below capacity as it relates to being able to provide the goods and services that you want to provide, you’re probably not going to lay a bunch of people off because you need everybody that you have.

In fact, you needed more, but you couldn’t find those skilled workers, but as with anything, you’ve got to be ready for these outliers.

You’ve got to be ready so that for those of you who are working, have concern about your position or your jobs, these are the times where you’re going to be happy that you did what a lot of people didn’t want to do, which was rebalance last year and understand that the market was going up, and up, and up, and it did even in the beginning of this year, but we rebalanced anyway.

You do these things when you don’t think you should. You don’t think you have to. Do it anyway, because that’s when it’s even more important.

As it relates to all of that, let’s talk about tax planning opportunities that a correction of 17 percent presents. Can you talk to the folks, remind them, how does tax loss harvesting work?

Brad: Tax loss harvesting is an opportunity to book an unrealized loss. Like if you hold…We’ll just make up an example, you have a small cap value fund. You spend $20,000 on it. The market goes down 15 percent. You now have $17,000 in this fund. We want to still maintain the same risk profile. We want you to be exposed to the same things.

We still want you to have small cap value in your portfolio because we feel that it’s a good place to be for the next decade, but we can book the loss by selling that holding and just taking the proceeds and reinvest it in something in the exact same asset class, so you never actually even spend a day out of the market.

You’re still exposed to small cap value one and stage two, but you’ve banked this $3,000 loss that you can use. It can either offset other gains, or if you don’t have other gains, then you can take it against your income at tax time.

Markets go up and down, you gain or lose money in…It almost seems like it’s just all this mystical up or down $3,000 today, but you can actually concretely take that loss and still be in the exact same position because you’ve just replaced it with something very similar.

Patti: In other words, if I hear you right, Brad, you’re basically asking Uncle Sam to offset a third of your losses.

Brad: Yeah.

Patti: In other words, on $3,000, you’re going to get $1,000 back on your tax return.

Brad: Exactly.

Patti: It’s just a different way of benefitting from what unfortunately does tend to happen in markets over time. You said $3,000, but let’s be real. What if it’s $30,000? How does that work?

Brad: It does the exact same thing.

Patti: Exact same thing, so basically let’s pretend for a minute that we don’t have a gain. You’ve got this $30,000 loss. There’s a limit of $3,000 per year that you can use against ordinary income.

Brad: Yeah.

Patti: Does that mean that we’ve got a $27,000 loss that goes completely wasted? A, you can take gains in holdings that held on to the gains, and you’ve been wanting to reduce your exposure there. That’s number one.

Let’s just assume that there aren’t any gains. There isn’t any opportunity. How will you talk about this carrying forward losses? How many years can you carry forward losses and use them in the future?

Brad: Forever.

Patti: Forever.

Brad: Yeah, assuming you live forever.

Patti: Which is a good point, you can’t take it at death, which actually is an important thing, because we do have clients who are older.

If we are banking losses, we want to recognize the fact that that, hey, you’re not going to be able to use this once you’re no longer above ground. We want to make sure that there are some gains to offset, so you’re taking advantage of this tax deduction.

Let’s bring this back to the virus, this is about coronavirus correction, so we’re in this correction. Maybe today might mark the first bear market that we’ve had since 2009. Yes, the coronavirus may have been the trigger. I think it’s been fascinating to read some of the articles, as I know you have, comparing it to the Spanish flu in 1918, right?

Brad: Right.

Patti: In 1918, on a worldwide basis, there was this horrible, horrible flu. Ironically, it was called the Spanish flu, but it did not originate in Spain. It was just that Spain was a neutral country at the time, and so during that period of time, the war propaganda and that sort, there wasn’t the independent journalistic approach that we have today in most countries.

Brad: That can’t be true.

Patti: It is true, Brad. I’m telling you.

Brad: It was worse than today.

Patti: Yeah, it was worse than today. Think about all the stuff they were talking about. Anyway, that’s a whole different subject. Going back to that, what happened during the Spanish flu was anywhere from 50 million to 100 million people died from the flu, and so a lot of people are making this comparison because that too was very virulent.

It was easily spread, but it was a different world then. We didn’t have the healthcare that we have today. We didn’t have the government shutting things down as we do today, and the plans. World Health Organization has had these plans, “If this happens, we do A, B, and C.”

In many respects, there is no comparison. For me, the only thing that we want to be cognizant of, and I mean this as a nurse, the resistance to antibiotics, people aren’t necessarily dying from the flu. They’re dying from secondary infections, typically pneumonia.

People with respiratory illnesses or where their immune system is compromised, that’s who is most vulnerable, and it is the resistance to the antibiotics that have occurred that makes this scary on the other end.

For anybody who is 60‑year‑old or what have you, I think it’s also interesting, and you brought this up earlier, the fact that in 1920, the average life expectancy was what, Brad, about?

Brad: I think between 50 and 55.

Patti: Literally, in 1920, you in your 40s would have been considered elderly.

Brad: Yeah, I should be retired and sitting on my front porch every day.

Patti: Don’t even think about it. We need you here.

Brad: Another year or two.

Patti: In your dreams. It is different. Life expectancies were much shorter, but it’s something that we’re watching. The numbers are, and you probably know this already, we don’t know what the real numbers are. So many more people probably have it that haven’t been tested, probably will never get tested.

They’re in their home. They’re dealing with it. They might not have symptoms, or very mild symptoms. It goes away, so the ratios are skewed.

We don’t know what’s going to happen with the virus itself, but we do know a couple of things. First of all, it is a fact that economies throughout the world have slowed down. There is not as much economic activity. Dollars are not exchanging hands here in the United States or globally, so that’s one thing we do know.

We do know that oil prices have plummeted. We also know that we were probably vulnerable already to a drop in the market because valuations were stretched.

What we don’t know is how long this is going to last. What we don’t know is the impact of the election. What we don’t know and never know is where we’re going to be next week, in three months, a year from now, even three years from now.

However, from a practical perspective, I believe in my heart of hearts that 5 years from now, 10 years from now, we’re going to look back at this and say, “Wow, it was really rough while we’re going through it, and it was scary, both from a personal level as well as a financial level.”

If we keep our heads level and understand that this is long‑term, and we understand that there’s a longer‑term, a really good financial plan that’s solid, you’re going to be OK, right?

Brad: Yeah, it makes sense.

Patti: Folks, thank you so much for listening. I hope that it’s helpful. Brad Everett, thank you as always for your very practical, right to the bottom line guidance and advice. I appreciate how proactive you and the team are today. It’s reaching out to people.

We know the people who are on cash flow, and we know the people who have a balanced portfolio probably won’t need the money, and we are treating each individual and each family very differently, given what’s happening in the markets today.

Patti: Thanks to all of you for joining us today. I hope this was helpful. Always feel free to give us a call any time if you’re worried. If you’re thinking about these things, if you want to know the impact of your personal situation, go our website, send us a note.

We will be happy to talk to you over the phone, bring you into the conference room. There’s no charge for that. This is why we exist, www.keyfinancialinc.com, that’s how you get a hold of us. Thanks so much for joining us today. I am Patti Brennan. I hope you have a great day and a healthy year.

Ep38: Social Security Speed Dating

About This Episode

There is a new bill that has been proposed by our nation’s lawmakers that could possibly create the social security reform that Americans have been waiting for. Patti dissects the pros and cons of this bill with her Chief Planning Officer, Eric Fuhrman. They identify the unique tax optimization strategies that all Americans can benefit from, as well as explaining the nuances of the bill that need to be understood for specific age demographics. Don’t miss this opportunity to learn how to save money on taxes or earn more in benefits received, if this bill is passed!


Patti Brennan: Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Hey, whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me today is Eric Fuhrman. Eric is our Chief Planning Officer. Again, you’ve made the commute, haven’t you, from your desk over to our podcast studio?

Eric Fuhrman: Yeah, all of about 50 feet. It’s an arduous journey to get here, but I made it. I couldn’t be happier to be here today with you, Patti.

Patti: Nothing is going to stop you.


Patti: No snow, no sleet, nothing, right?

Eric: That’s right. Uphill both ways to get into this podcast studio.

Patti: You know what? Do we have an exciting topic. It is Social Security speed dating.

Eric: I would say more than exciting, Patti. I think we’re going to start out 2020 with a bang. If you’re going to do it right, you’ve got to start off with Social Security, which there’s no more topic that’s bigger than that.

Patti: I hope it’s OK to do this, the speed dating thing. I never know what’s OK to say and what’s not OK. We’re going to hit the ground. We’re going to do this, Eric, because there’s a lot to talk about in a short period of time.

Eric: It sure is. This is a big topic. People out there are busy. We’re busy. We’ve got to make sure we cover a lot of ground in a short period of time.

Patti: The most important thing as you guys listen to this podcast today is that, especially towards the end, we’re going to be talking about a new bill that has been proposed, that is really getting some traction.

Eric, we get the question all the time. Is Social Security actually going to be there? If this thing goes through, it will be there. We want to talk about what it’s going to mean in terms of your paycheck, your income taxes, and how much you’re going to have to contribute.

Eric: This is really the first major revision since, I want to say, maybe it was 1981 or 1983. I forget exactly. That was the last time Social Security really had a major reform that took place. A lot of exciting stuff in there that really is meant to basically preserve this program for the next 75 years.

Patti: They’re projecting out – it’s really hard for me to actually say this – the year 2100. How about it?

Eric: We won’t be around to see it, I don’t think.

Patti: You might be.


Patti: Let’s first talk about the filing strategy. A lot of the strategic things that we used to do, we can’t do anymore, but there’s still some really interesting opportunities and planning implications for everybody that’s listening today.

Eric: Really, there’s basically for most people out there – we can’t say for everybody because there’s a lot of unique situations – but for most people, there’s really a two-track filing path that you can take. Really, the first one you have to think about, this is all driven by the year you were born.

For those that were born before January 1st of 1954 have a unique track that they can take, where some of these advanced filing strategies are still available, versus those who were born after January 1st of 1954. Then, at that point, there’s a very limited number of options that you have to consider.

Patti: There are still some options. Let’s talk about the first one. This is the restricted application. Again, we’re in 2020. It really is relevant for those people who were born between January of 1951 and January of 1953, right?

Eric: Right. This subset of people will still be younger than age 70. Benefits can’t be delayed beyond age 70. They’re going to be old enough to file for benefits where there’s no reduction because you’re under full retirement age.

Patti: I suppose you can file later, right, after age 70? Just there’s no advantage to that.

Eric: That’s a great question. I don’t know why you would wait any longer. It’s like leaving money just sitting on the table. Actually, I’ve never heard of anybody waiting that long. I don’t know if the Social Security Administration calls you up and lets you know…

Patti: Would that be nice, huh?

Eric: …or they just automatically start paying. Good question.

Patti: Given the fact that in our office here locally, you pretty much have to go first thing in the morning and plan to be there all day long. I have a feeling that on top of the meetings and all of that, they’re not actually making phone calls out to remind people to come and collect.

Eric: I would doubt it. I would say I’ve gone along with several clients, as you have, to the Social Security office. Not a fun place to be. Regardless, you’re probably right on that one.

Patti: Let’s go over this restricted application. It’s really applicable for people who are pretty much the same age. If there’s a wide dispersion between ages, one spouse versus the other, it probably doesn’t work quite as well. Why don’t you walk everybody through it?

Eric: Again, just as you pointed out, this is assuming you and your spouse are roughly the same age as one another and, again, both of you are eligible, meaning that you’re full retirement age. Essentially, the idea would be is, if you have two spouses, one in the household is the higher earning spouse, and then you have another spouse that has a lower lifetime earnings.

The concept of the strategy is basically the lower earning spouse, assuming they’re full retirement age, would file for benefits to start receiving their regular benefits based on their lifetime earnings. As soon as they have officially filed, that then allows the higher earning spouse to go and file but file a restricted application to just receive their spousal benefits alone.

Patti: When you say higher earning spouse, it doesn’t mean that they’re still at work. It just means that over their lifetime, they earned more money.

Eric: Exactly right. If you looked on your Social Security benefits statement, which are basically electronic nowadays, if you compared the full retirement age benefit amount between you and your spouse, say at age 66, the spouse that has the higher benefit wants to delay that benefit.

Essentially, as you delay benefits from 66 on to 70, you get something called a delayed retirement credit. That delayed credit mathematically has a higher value when it accrues on the spouse that has the higher lifetime benefit.

Patti: The best part is you’re both receiving some form of Social Security. You’ve got the cash flow coming in from that.

Eric:It’s a fabulous way. One spouse is receiving benefits. The other spouse is basically getting paid to wait, and there’s an investment component because that delayed retirement credit is roughly eight percent that they’re earning on delaying benefits.

Patti: There’s no risk.

Eric: Exactly right. You could always stop and turn it on at any point in time. You’re not committed to this idea of delaying until age 70. You can turn it on at any point that you would like depending on your circumstances.

Patti: Let’s take it to age 70. What happens then? What has to happen?

Eric: What would happen then is the one spouse that was receiving a spousal benefit then switches over to their higher benefit. If you were, again, full retirement age is 66, your benefit from 66 to 70 has now grown by 32 percent. Now you will switch over to your higher benefit.

Then there’s a nice little ancillary benefit, which is basically the spouse with the lower benefit might actually get a bump up. Again, they’re always going to get the higher of the two, their own or 50 percent of the higher earning spouse when that spouse was age 66. It’s possible even the lower earning spouse could see an increase as well as the higher earning spouse.

Patti: Because they waited till age 66 or full retirement age, there’s no disadvantage. There’s no penalty. They’ll get 100 percent of whatever they’re supposed to receive, the higher of the two.

Eric: Exactly right. You can continue to work as well. Once you’re full retirement age or over, there’s no earnings limitation. You can earn as much as you want. Your benefits won’t be reduced.

Patti: That’s excellent. Let’s talk about for those people who were born after that date in 1954.

Eric: That becomes a little easier in terms of your decision because the restricted application is virtually dead at that point. That might not be the best term. It’s essentially gone. Pretty much, when you go to file for benefits, there’s no way to get a spousal.

You’ll still earn delayed retirement credits if you wait beyond your full retirement age, but, again, you cannot have this arrangement where you’re essentially getting paid and earning the eight percent delayed credit.

Really, it just comes down to the idea of if you have financial assets, if you have longevity and health on your side, then the odds would suggest it’s probably a pretty good idea to delay benefits.

If you need the income, if there’s a health issue that might have some impact on longevity, then you might want to consider turning the benefit on as soon as you’re eligible or as soon as there won’t be a reduction.

Patti: There is one exception to this rule, isn’t there, Eric? Let’s talk about.

Eric: Yes. Again, just keep in mind you have to run the numbers here. Anything we’re talking about today, you’ve got to run the numbers or find somebody that can run the numbers for you that’s qualified to do this.

Let’s say, for example, you have a child, an adopted child, a stepchild, or let’s say a dependent grandchild that you’re taking care of. That individual can also qualify for benefits on your record as long as they are under the age of 18 and a full time student.

Patti: Let’s walk through this for a second. That’s a fascinating planning technique or a wonderful opportunity that people may not realize. Let’s say, unfortunately, because of the opioid crisis, we actually know several families where the grandparents have taken over the care of the grandchildren.

What you’re saying here is that they can begin to receive an additional benefit as long as that grandchild is under the age of 18, based on the grandparent’s Social Security.

Eric: Exactly right. Again, you’ll have to go and look at your numbers. Everyone’s Social Security benefit statements will lay out your benefits. Underneath that, it will also lay out benefits that are available to, say, a minor in the event of disability, death, things like that.

Patti: The most important thing, folks, that you should know is that doesn’t reduce the amount of the grandparent’s benefit. It literally is another cash flow that’s coming into the household.

Eric: Here’s something interesting as well with that. Let’s say your child is pick an age here 15, 16 years old. Let’s say they work. There is an earnings test, but the earnings test only applies to the child’s benefit. It has no impact on the grandparent’s benefit.

Just keep in mind we want to encourage them to go and work, but they can still receive benefits. If they are of sufficient earnings, it wouldn’t impact your benefits. It would only impact the child’s benefit.

Patti: That little tidbit is really important. It just goes to show you, to your point earlier, that you really have to go and run the numbers. There are some unintended consequences of something that you would want to encourage. That is go out and get a job and make as much money as you can.

Eric: Responsibility.

Patti: Just be careful about how much is enough. Let’s go through this next thing, called the redo strategy. I call it the…

Eric: The oops strategy. [laughs]

Patti: Or a mulligan. How does that work, Eric?

Eric: You have to consider you have a couple options. Let’s say you, for one reason or another, have filed for benefits. Then you come to the realization that maybe I shouldn’t have done that. Is there a way that I can undo this decision?

The question is you always have options that you can consider, but the timing is really relevant here. If you make an election within 12 months of filing, you can actually withdraw the Social Security benefits.

Now the issue with that is let’s say you started benefits for nine months. You decide it was the wrong decision. You want to withdraw your application. At that point, you have to repay all the benefits you’ve been receiving.

Patti: At no interest though. No interest or penalty, right?

Eric: That’s a very good point. Right. Also, you have to consider if anybody else on your record, say a spouse or, again, a minor child like we just talked about, you will also have to repay the benefits for them as well, and those individuals have to consent in writing that they’re OK with this.

Just keep that in mind. The redo is if it’s less than 12 months, you can stop your benefits, pay everything. You just have to pay everything back.

Patti: Why would people do this? What would be the advantage for them to pay all that money back and take that mulligan?

Eric: You never know. There could always be a change in circumstances, where prior to something happening there could have been a real need to start benefits early. Then conditions on the ground change. Maybe it wasn’t as relevant as it was before.

Basically, you have to remember. Starting benefits early there’s basically almost a seven percent per year reduction in benefits. Somebody starting benefits early could see a 20, 25 percent lifetime reduction. If you have longevity on your side, that could cost you serious money if you end up living a very long life.

Patti: Whether it applies to the mulligan or the strategy we’re about to talk about in a second, I find that a lot of people, they think that they want to retire. Then once they do retire, they’re like, “Wow. This isn’t really what I thought it would be.” They find themselves bored, unchallenged, a loss of purpose.

They want to go back and get another job. They started Social Security. They’re getting the income. Then they go back to work for a company or start something. They start making some real money and think, “Well, I don’t need all this cash flow. By the way, I could give the Social Security back because I don’t really need it.”

Eric: You know what’s so fascinating about that, is that we can talk to that from real-world terms. How many meetings have you sat in where, over the years, we’ve had long term clients, where all they wanted to do is just know that they could? Then they finally got there. It wasn’t what they thought. They realized they like being productive and adding value.

Patti: For those people who we’ve worked with, it’s really fun to see how they figure out that next season of life and how they find new purpose, whether it be another job or in consulting or what have you. They don’t have to go back to that corporate…

Eric: Daily grind, right?

Patti: Exactly. That’s a lot of fun. As part of that counseling, we say, “OK, you elected Social Security. Let’s just go ahead and figure a way to take this mulligan. We’ll pay it back.” Again, you can refile any month of any year. It’s a heads you win, tails you break-even type of transaction, right?

Eric: Right. To bring this back full circle, to your point, what if this occurs beyond that 12-month window where you can do the redo? You still have other options. These are interesting.

The first one is basically go back to work. If you’re under the full retirement age, there’s going to be an earnings limit. If you go back and you earn more money – again, we’re doing this because we want to eventually, your Social Security benefits will be reduced.

Take a peace of mind in the fact that Social Security will give you credit for any of those benefits that you did not receive because of working. That will come back to you. You’ll get a credit from Social Security once you reach full retirement age. All is not lost.

Patti: All is not lost, but that does take time. That takes time over your lifetime. The takeaway is first and foremost, understand what the earnings limit is before you go back to work. If you’ve done so, if you collected Social Security early before full retirement age, you decide that you really do want to go back to work.

You’ve got to make sure you don’t earn over a certain amount of money. Again, to your point, Eric, it’s OK. You’ll eventually get that money back. At least you want to know the rules of the game before you go ahead and do something like that.

In that case, maybe Plan B would be rather than continuing to receive Social Security and have that income limitation, let’s say that you could go out and make $70,000 a year but you’re getting Social Security. If you make that kind of money, you’re going to have to give some of it back. At that point in time, they can suspend their benefit, right?

Eric: Yeah. Another option…This would be regardless of, say, whether you went back to work or not. It’s interesting. I feel like it doesn’t get a whole lot of press, I guess. Which is let’s say you started taking benefits early. Now, you’ve finally reached your full retirement age. Let’s say it’s 66 or 67.

At that point in time, you can actually elect to suspend your benefit. Then you start accruing that eight percent credit. Just think of an example here where, let’s say, somebody started at age 63. They had a 20 percent reduction in their benefit because they started early.

Let’s say they get to age 66. They defer their benefit for basically the four years between 66 and 70. They can actually increase their benefit from that point, where it would actually be worth more than what they would get at, say, age 66 because they’re receiving that eight percent credit. Again, the other important point here is you don’t have to pay any of your benefits back.

Patti: That’s key.

Eric: You don’t have to pay any back. It’s just strictly getting to age 66, suspending. Then you start accruing that eight percent benefit again. That’s another interesting way that you can undo maybe a decision that you regret.

Patti: A decision that you made, that maybe you look back and say, “Oh, I wish I hadn’t.”

Eric: Just keep that in mind. Also keep in mind too if you do that, again, anybody receiving benefits on your record would also see them suspended as well.

Patti: Although somewhere I saw except for an ex spouse.

Eric: Anyone out that’s been divorced, as long as it’s been more than two years, then you don’t have to worry. Some of these decisions won’t affect you if you’re receiving benefits on an ex spouse’s record. Great point.

Patti: Now we’ve talked about that, what about the concept of retroactive benefits? Let’s say that you waited on Social Security. You decide at age 68, “I’m going to go ahead and just start Social Security now.” When you go to the office, the wonderful person says, “By the way, we will give you a check for the last six months as a lump sum.” What do you think about that idea, Eric?

Eric: It’s interesting. A lot of people don’t know of this concept of retroactive benefits until they actually go and file. They didn’t file exactly when they would have been eligible to receive benefits, they waited for one reason or another.

Social security is dangling this carrot in front of you, this bag of money, if you will, and who doesn’t like that, that they could receive the prior months of benefits? What’s important to realize about retroactive benefits is that it only pays for six months.

Let’s say you were eligible at 66, you walk in at 66 in four months, you can get a retroactive benefit to pay you those benefits you were to receive for the four months that you’ve been eligible. Let’s say you were eligible at 66 for benefits, you don’t file until 67, the retroactive benefit again will only be for a six month period. That’s the limitation.

Patti: There are times when you maybe don’t want to take that lump sum, though, aren’t there?

Eric: Right. That carrot that they’re dangling in front of you, you have to think about the long term consequences of that decision. It all comes around what our expectation for life expectancy is.

The basic fact is when you think about those benefits, because you filed late, you’ve been accruing delayed retirement credits. A six month retroactive benefit has the impact of increasing your benefits by four percent for the rest of your life.

Just keep in mind that if you have an average to above average life expectancy, that that retroactive benefit could actually cost you a lot more in terms of what you could receive over your lifetime by taking that.

Sometimes, as long as we’re talking about your own retirement benefit, genuinely it might be better to forego the retroactive benefit and make sure that you’ve earned that delayed retirement credit, because it could be a lot more valuable.

Patti: I’m going to tee this one up, because you just did. Now, as long as we’re talking about your own benefit, what about a spousal benefit? How about if they go back, go in, and you’ve delayed, etc., and your spouse has also delayed? Should they also say, “Thanks, but no thanks” on that lump sum?

Eric: Patti, that’s an excellent point, because spousal benefits or survivor benefits don’t accrue the eight percent delayed retirement credit. You should always accept…

Patti: That bag of money.

Eric:Y eah, that bag of money, the retroactive benefit on spousal or survivor benefits, because there is no delayed retirement credit that applies there.

Patti: Very interesting, so just know the rules of the game before you go into that Social Security office. That is really great information.

Now let’s talk about this wonderful new piece of legislation that has been proposed called H.R. 860, very technical name, right?

Eric: Yeah.

Patti: It feels like the SECURE Act that just passed. We heard about it for a year or so, and then it died down. It didn’t seem like it was going to through, and then, lo and behold, all of a sudden at the end of last year they push it through.

The SECURE Act is going to affect everybody listening to this podcast. We won’t go through all of it, but the real big one is that required minimum distributions which used to have to occur at the age of 70 and a half or begin, that’s now delayed until age 72.

You’ve got 2 extra years theoretically, before you start taking a certain amount out from your 401(k) or IRA or any retirement plan. Right?

Eric: Right.

Patti: That’s what the SECURE Act is all about. We’ll do another podcast on that, because it has some other implications for your beneficiaries.

I wanted to bring that up, as we talk about this legislation that has to do with Social Security, because those two can go hand in hand in terms of some really, really interesting planning opportunities.

Eric: Yeah, I couldn’t agree with you more. I sit there, and we think back over the last couple of years, and it seems like so many major things, whether it’s changing the Social Security filing strategies, the SECURE Act, or this piece of legislation, they almost seem to come out of nowhere.

They don’t seem to receive any kind of attention, and then all of a sudden they’re passed, and there’s major changes that affect everybody.

Patti: Even think about the law that went through at the end of 2017, nobody thought that was going to go through, and then, boom, it happened. Corporations are now paying a lot less tax, many people are paying a lot less tax. Never say never.

Everybody’s been worried about Social Security, and it doesn’t seem like there’s been the political will to do anything about it. Well, [indecipherable 22:27] you hear some of the things that they’re looking at doing as it relates to this, because it could really solve the problem in maybe a way that isn’t nearly as painful as we had all feared.

Eric: I think what’s always important is just keep in mind this is not law yet, so anything could still change. This is just a recent example or some of the things that are in this existing bill.

The first thing that people should be aware of is that basically there’ s a proposed increase in benefits across the board. There’s big important distinguishment with average, but the average person would see a two percent increase in their benefit. Keep in mind that average is not evenly distributed.

People that might have had lower lifetime earnings will probably see a higher increase than two percent, whereas people that have historically been on the higher end of the income scale will probably see less than the two percent increase in their benefit. Overall, across the population of all these recipients, average benefits will increase by about two percent.

Patti: Let’s stop there. The two percent doesn’t sound like much to me, so let’s put that out there.

It’s not a cost of living increase. It’s just a one shot, one time perk, if you will, of an increase in the benefits. From there, whatever the cost of living increase, as that occurs, that’s also going to increase your benefits over time.

Eric: Yeah, you’re right. It’s basically the way that they calculate benefits. We won’t get into the weeds of that, but basically the way in which the calculation is done will change, and that’s what’s leading to this increase for folks.

Patti: The cost of living increase and the way that it’s calculated actually is a potential benefit to everybody listening. It has to do with how they calculate inflation, right?

Eric: Yeah. Basically that cost of living increase, everyone gets the letter from Social Security informing them of their benefit for the coming year.

Patti: They tend to evaporate in thin air, because Medicare premiums go up more than whatever it was the Social Security increase. A lot of people don’t really feel that in their pockets. Let’s put that on the sideline, because maybe the way that they calculate COLAs will help in that area. Sorry, Eric. Go right ahead.

Eric: I was just going to say right now the way Social Security receives the COLA is based on what’s called the CPI for urban and clerical workers. This is the expression of average price increases for people across the country.

There’s a different CPI index, CPIE, which is basically used to essentially illustrate cost increases for those who are over age 62, so things like medical and shelter expenses are more heavily weighted. That tends to increase faster for individuals in that cohort.

The discussion is using CPIE rather than the normal CPI, because they feel that might be more representative of how people on Social Security benefits actually experience cost of living increases.

Patti: Last year, if the increase for Social Security was 1.8 percent, then it’s reasonable to think that the CPIE would have been 2.2 percent. It can be meaningful, because it’s a compounding effect over time, too.

Eric: Yeah, yeah. Exactly right.

Patti: That’s interesting. We’ve got the cost. What about the minimum benefit? That’s interesting, especially for people who may have had more modest incomes over their lifetimes. That’s important, because there’s a new floor, if you will, in terms of how much you can receive.

Eric: Exactly right. For those individuals that were in the lower income bracket, Social Security is going to replace a much higher percentage of your income in retirement.

The idea here is that you’ve accrued benefits based on the Social Security’s calculation, but there will also be a minimum benefit, which basically takes 125 percent of the federal poverty level.

When you get to retirement, you’ll get either your own benefit or this new minimum benefit if your lifetime earnings were low, and that would be higher. That’s a benefit there.

Patti: Folks, for those of you listening, that minimum benefit from Social Security is now going to be $15,612. I say now if this thing were to go through as it exists. That’s important, because we want to lift everybody in our society, and income and cash flow is one way to do that.

Eric: Yeah, absolutely right.

Patti: Fine and dandy, all these nice little perks. How are we going to pay for this, Eric?

Eric: The quintessential question, right? [laughs]

Patti: Yes. All fine and dandy. Free college for everybody in America, but how are going to pay for it, right?

Eric: Going to have to be paid from somewhere, remember? Someone’s income is usually somebody else’s expense. That tends to be how it works.

Right now, what they’re proposing is there is basically a taxable wage base that Social Security taxes apply to, if you’re, say, a w2 employee or so forth. Right now, for 2020, you pay Social Security taxes in the first $137,700 that you earn. Every dollar after that is no longer encumbered by a Social Security tax.

Patti: By the way, folks, your employer matches that, so you pay half, your employer pays half.

Eric: Right. Now there is a proposed second tier, where the first 137 is taxed, then you don’t pay anything, but for the one percent of individuals in this country that earn over 400,000, then a Social Security tax will come back in on any income above 400,000.

Patti: There’s a doughnut hole then. Is that a way to look at it?

Eric: I like the term.

Patti: Got to compare it to something we already know, right?

Eric: [laughs] Yeah, I like it.

Patti: We got the doughnut hole. Between the 137,700 and 400,000 no Social Security will be taken out of your income or your employer’s. Over 400,000 you’re back to paying Social Security tax.

Let me play devil’s advocate. Let’s say that you’ve got somebody, and they’re in that income bracket or above. How is that going to be dispersed among our population? Does that go to everybody from the top tier 400,000 and above?

Eric: That’s an interesting point. The worry would be is it a grab to find a way to shore up the system and pay for it by taxing people in the highest income bracket?

Our understanding of the way it is currently designed is that anybody that second tier tax would apply to, all of the benefits that you pay into will accrue to those individuals that pay it.

It’s not like just extra money going into a fund that’s dispersed against all recipients of Social Security benefits. Anyone that’s a subject to that tax, that tax does come back to those individuals that were subject to it. Great point.

Patti: It doesn’t feel like that alone is going to be enough. There must be more to this bill to pay for this, right?

Eric: Yeah, yeah.

Patti: What else is going on? Of course they’re going to have to increase the taxes for all of us. Is that right?

Eric: Yes. Social Security gets its funding primarily from payroll taxes. Basically with those who are working pay in to, basically, fund the benefits for those who are receiving. Right now the payroll tax is basically 12.4 percent, that’s 6.2 for the employee, 6.2 for the employer.

The discussion is they will increase that by one percentage point, from 12.4 to 13.4, but that increase is going to be phased in over a 10 year period, so it’s not just going to happen all at once. It’ll be very subtle, you probably won’t even notice it for the most part.

Patti: It’s something that everybody is – there’s outcry – “You’re increasing our social security taxes, yada, yada, yada.”

But really, when we put a calculator to all of this, up to 137,700 basically what it means is an extra $688 per year for the employee and another $688 for the employer. It’s not hugely dramatic to shore up the system for another 75 years.

Eric: The arguments to shore up Social Security have always been the sooner you do it, the less drastic the change has to be. Seems pretty sensible in terms of what they’re doing.

Patti: I like this third one, Eric. Folks, just listen up. This one has very important implications for everybody listening today.

Eric: We’ve got to save the best for last, right?

Patti: Of course.

Eric: Always. I agree. There are so many downstream effects of what this might do if it ends up passing. Right now, you may or may not pay taxes on your Social Security benefits. Some people pay zero. Some people, 85 percent of their benefits is included for taxation. They use this formula called provisional income.

Basically, right now, for the most part, if you’re married filing jointly, as long as you’re modified adjusted gross income, or what they call provisional income, is above $44,000, 85 percent of your benefit comes in for taxation.

Patti: Let’s just be real here. Most people are paying taxes on pretty much most of their Social Security, especially people who are over 70 and a half or, now, 72. Your required minimum distributions are boosting your taxable income. Most people are going to be paying taxes on their Social Security. Is that fair to say?

Eric: Absolutely. It all depends on your situation, where you’re getting income from. Yeah, a lot of people do pay taxes. A lot of people say, “Well, I paid taxes to build this benefit. Now I’m paying taxes on the benefit that I’m receiving.”

Patti: So much for the Boston Tea Party. Double taxation is unconstitutional. That’s another subject for another day.

Eric: I was going to say the big thing here is that they’re talking about raising that limit. If you’re married, filing jointly, now your benefits will not be taxed until your modified adjusted gross income is above $100,000. That is a game changer in terms of planning opportunities and things you can do.

Patti: It is absolutely huge, especially because a lot of people, their Social Security could be $50,000, $60,000 at that point in time. It’s a very big deal. It really allows for a lot of interesting tax planning.

Eric: I would say so much when we do our analysis for whether a Roth conversion makes sense, so much of it is predicated on the fact that every dollar we convert in Roth money to get it into this tax free environment could potentially basically bring in more Social Security benefits which will be taxed.

You’re getting this Social Security benefit that isn’t being taxed. Now it’s being taxed because of the conversion. It’s really a difficult thing to justify.

Patti: It’s an unintended consequence. Just to frame this, the Roth conversion idea works like this. Let’s say that you have money in a 401(k) or an IRA. You’re looking at, “Gee, I don’t want to have to pay 25 or 30 percent tax on this when I’m 72 years old. Is there a way to get this into an environment at a cheaper overall tax cost and then from there let it grow tax free?”

There’s a period of time after someone retires where chances are you might be in a 12 percent tax bracket. I’d much rather pay 12 percent than 25 percent. Wow, you’ve cut your taxes in half in that scenario, just to keep it simple. It’s very difficult under the way the Social Security rules work right now because by doing that we’re exposing more money to more Social Security to taxes.

Eric:Where it wasn’t being taxed before.

Patti: You need software. You need people to really do the analysis to figure out whether or not this works. Fast forward, this new law comes in. Wow, all of a sudden you need $100,000 of income before taxing Social Security is even a consideration. More people are going to be able to do Roth conversions, which is interesting.

It makes me think. Now that I’m thinking about this, Eric…We haven’t talked about this. Our federal government, they’re not really that stupid. They need revenue. They want revenue sooner versus later.

Why don’t we give people an incentive to do Roth conversions so that we can get the taxes on that money sooner instead of waiting until they’re 72? More people do Roth conversions. The federal government gets more income. You see the domino effect.

However, Roths are powerful. The government, unfortunately, is often also very short sighted. They’ll get their money up front. It’ll be at a lower rate. More importantly, on the Roth, that now grows tax free for the rest of your life and for a portion of your family’s life, the people who are inheriting it.

Eric: The really key point here is that if this goes through, there’s the opportunity to do significant Roth conversions without having the diminishing effect of pulling Social Security in for taxation. Paired with the SECURE Act, now we have an additional 18 months or so that Roth conversions can be done because required minimum distributions have now been pushed back.

Patti: This is what in our office I hope it doesn’t offend anybody this is what we call a BFD. This is a big deal.

Eric: [laughs]

Patti: You really want to know once this thing goes through. By the way, we’re talking about Roth conversions. The other way to look at this is if you’ve got a few years and this thing goes through, maybe you do a Roth conversion one year.

Let’s say that you have a security, a stock from the company that you used to work for. It’s got a huge capital gain. If you’re in a 12 percent tax bracket and you sell that, up to a certain point, then there is no out of pocket outlay.

Whether the Roth conversion makes sense or for risk management purposes selling stock that has appreciated a lot or even just rebalancing the portfolio, those are judgment calls year to year. More people are going to have those opportunities.

It’s all about the planning, the planning opportunities. Comes down to Social Security. Comes down to cash flow. What do you need? When do you need it? That’s financial planning 101, right, Eric?

Eric: Exciting stuff. It’s what keeps me getting out of bed every day.

Patti: Me too, absolutely. It’s going to keep me getting out of bed for many years to come.

Eric: You got it.

Patti: Thank you so much, Eric. This has been a lot of fun. Thanks to all of you for listening. This has been really important information. We will keep you posted as we learn more about this new law. It will affect everybody listening.

If you have any questions, please go to our website. Any ideas, any things that you want to hear about, we’d love to hear from you. Until next time, I’m Patti Brennan. I hope you all have a great day.

Ep37: Sterling Shea – Barron’s Global Head of Wealth Management Discusses Industry Trends: Part 2

About This Episode

Sterling Shea, Global Head of Wealth Management for Barron’s and Dow Jones, continues his discussion with Patti regarding the industry trends he is seeing. What differentiates the nation’s Top Advisors from others? What is the client experience that is to be expected in today’s market? Is the economy heading towards the bear market everyone seems to be talking about and if so, how does he see Top Advisors navigating these waters for their clients? In part two of the two-part series, Patti and Sterling break down the industry trends that he is seeing and what investors should be looking for in 2020.


Patti Brennan: Hi, everybody. Welcome back to “The Patty Brennan” show. Hey, whether you have $20 or $20 million, this show is for all of you who want to protect, grow, and really use your assets to live your very best lives.

Coming back to join us is Sterling Shea. Sterling is the head of Global Wealth Management at Dow Jones and Barron’s and boy, for those of you listen to the previous show, it was a terrific show, you know, we usually keep these about 20 minutes and then about 30, 35 minutes, we’re still talking.

This is going to be a further conversation on the topic that we were discussing, not just from a market perspective or some of the mistakes that investors are making, but also the trends in what Barron’s sees going forward over the next 10 or 20 years. Sterling, thank you so much for joining us.

Sterling Shea: It’s always a pleasure to spend time with you, Patti. Thank you for inviting me.

Patti: It’s a blast and it’s so important for everybody to hear some of your thoughts as it relates to not just the advisory business, but the difference that advisors can make for their clients, and some of the mistakes that Barron’s has been noticing in terms of what people are doing with their money.

Sterling: I think it’s an important topic to discuss, particularly if this is in fact, a late stage of the investment capital market cycle. If you think about the way investors tend to behave and the decisions that they make, we think it’s particularly important for people to get good counsel and good advice now.

Traditionally, in the American investment markets, bull markets, last on average seven years out. We’re about 12 years, probably 11 years into this one at this point. Inevitably, you’re going to see that capital market shift. That shift tends to happen with catharsis and a significant downturn that leads to shock, bad decisions, negativity, and fear, frankly.

Typically, the end stage before that is one that’s about greed. We’re not seeing that now. If you wanted to argue the inverse that this market will continue to go, historically, bull markets have ended in euphoria. I know about your friends, but not too many of mine are feeling euphoric right now.

That would argue that as long as there’s a wall of worry to continue to climb. That the market can perpetuate its gains. At the same time, inevitably, markets are cyclical in nature. We will, it’s not an if, it’s a when, will you feel that sharp downturn, fear, and uncertainty.

Volatility is likely looking at the decade to come to be higher. Returns across all asset classes are likely to be lower.

Investors need good counsel, good advice to stay the course, stay diversified, not just in terms of their investments with their broader financial diversification and avoid concentrations.

Patti: It’s an excellent point. We were talking earlier and on break, I go in, we go into every day of every year, assuming that the next terrible bear market is starting today, especially for those people who are living on their portfolio, receiving income, they’ve got tuition payments or they’re in retirement, we’ve got to make sure there’s plenty of buffers so that they can weather that.

It’s about managing those expectations. Just as you said, it’s not an if, it’s a when. Understand it’s going to happen. We even quantify it.

Sterling will say, “Hey, if you have a $2 million portfolio and $1 million is in equities or stock funds, you should expect to lose anywhere from $300,000, $400,000. It could be that high. Understand that it can happen. It might happen, and you’ll still be OK.

Sterling: Right. It’s the idea of trying to avoid buying high and selling low. You want to see through market perturbations with a diversified portfolio, with the understanding it’s going to cycle a bit.

I would also say that that one of the mistakes that investors make is often, sometimes, particularly among younger families, they’re too conservative. They think, “I want to be very safe with my money. As a young family with a very long time horizon, I’m going to pick very conservative investments and make very conservative decisions.”

In fact, you’re not going to participate enough in market movement. That power of compounded interest over time, it can be such a tremendous builder of wealth. To do that, you have to participate fully in markets. You need to stay invested, and that they’re being overly conservative.

Patti: Financial security is often, people use that terminology to say, “I want to be super secure. I want to be super safe,” and the opportunity costs. I often tell people, Sterling, don’t confuse stable with safe.

Think about the next 20 or 30 years and retiring and not having that extra cushion, that extra million or $2 million that you could have had if you had just had a well balanced portfolio, tweaked it from time to time. We are not market timing, and that’s important for everybody to understand.

Even though you and I both believe that there’s going to be a bear market, we don’t know when that’s going to happen. Let’s not pretend to know something that nobody can possibly know.

There are too many factors that influence that, but we just have to understand the fundamentals of why stocks go up. Those fundamentals may not be the same today as they were 12 years ago. Let’s be realistic about this and make decisions that are right for you and your family.

Sterling: Absolutely. That’s the key point, that you have a talented financial advisor that’s deeply understanding the individual nuances, needs, risks, and investment objective for a given client family. It has to be anchored in that comprehensive financial planning.

The best portfolios as we see them are inclusive of alpha, beta, non correlated asset classes, including alternatives, a wide range of different investments. But that mix should be dependent upon the individual nuanced needs of that given client family and their investment objective and risk tolerance.

Patti: To me, the most important thing is to be able to explain it in words that clients can understand, “Gee, if the market went up 20 percent how come I didn’t get 20 percent.”

Well, here’s why. Here’s what we believe. Over time you get that compounding and that works in your favor that you want to build upon that base as much as you possibly can each and every year, rather than experiencing the massive ups and downs. It’s a matter of education, right?

Sterling: Absolutely. A smarter client’s a better client. Anything the advisor can do to help empower clients to better understand what’s happening, what is the machinery of that investment output, it’s in everyone’s best interest.

Patti: For those of you who are listening today, probably as you meet with your advisors, Sterling and I both agree there are a lot of good advisors out there. That as things are occurring, it’s so important not necessarily to react, not necessarily to make a judgment about the advisor. Understand that it’s about the environment.

The key here is to make sure that you have a good understanding of not only what’s happening and why it might be happening, but what anybody should be doing about it or maybe not doing about it, right?

Sterling: Yeah, trust is vital. You have to have someone who you feel very comfortable completely opening up on your family situation. If you’re holding things back from your advisor, it’s like holding things back from your doctor. It’s not going to have a good outcome.

To be a better client, you want to be empowered. You want to have your advisor help you understand with full clarity what’s happening in money, why it’s happening, but there has to be that trust. There that has to be that clear line of communication. It should be a multi generational engagement with the advisor.

It should be the entire family, both spouses coming together to give the advisor as much information, as much opinion, as much feeling, everything that can be wrapped into their comprehensive financial situation.

It’s the advisor’s job, not just to manage simply the investment portfolio, but to weigh in on estate planning, multi generational wealth transfer issues, philanthropic planning, all of these different aspects of your financial life.

The more information that you can provide that advisor, the greater the likelihood that they’ll be able to craft the ideal solution to lead to the highest probability for a good outcome.

Patti: Your point is such an important one because family dynamics are so unique to each individual family, and to understand those family dynamics and to take the time to listen and understand and meet with the kids.

Boy, Thanksgiving and Christmas is the busiest time of year because we’re meeting with these kids, whether they’re in college or they’ve got some time off so that they understand that if something happens to mom and dad, we’re going to be here, it’s going to be seamless and we’re looking out for everybody.

Sterling: That’s also an interesting trend we’ve seen in the wealth management industry. Those teams that are attracting a greater number of clients and client assets, have diversity within them. There’s gender diversity, there’s age diversity. It’s a team of advisors meeting with multiple multi generational engagements with the clients.

Patti: There’s a lot to be said for that because I could meet with a young couple who just got married and give them advice, but it’s quite another thing for Michael or Eric to meet with them. They’re the same age, they’re in the same boat, and they can relate on a one on one basis to the things that they might be going through.

Sterling: Yeah. The more information they get, the more they can better analyze what is the intent of that wealth, what is the investment objective, what goals are they trying to meet. The better informed the advisor can be, the more information they have to craft a better solution set.

Patti: I think that ultimately, we literally can craft our solutions based on the demographics of the clients, their kids, etc. Speaking of which, let’s talk about demographics in the industry because as I just alluded to, we’ve got different people here on the team who are experts in different areas and we try to pair up accordingly.

Tell me, a little bit more about what’s happening in the industry in general?

Sterling: Yeah. It’s a concern of ours that there’s a dearth of young talent coming into the industry for a multitude of reasons.
Even right now if there was an upswing of young people wanting to come into wealth management, there’d still be an hourglass effect. The average age of a financial advisor in this country is around 57.

There are more CFP, Certified Financial Planners over 70 than there are under 30.

Patti: OK, everybody, I am not one of them FYI.

Sterling: Yeah, but it’s a problem. There’s only about 16 percent of the industry that are women. Ethnic diversity is sorely lacking as well, while new pools of capital and wealth creation are happening in ethnic communities.

You’re seeing these emerging pools that are going to matter deeply to the American economy moving forward that aren’t being adequately addressed within the industry. There’s a need for greater diversity.

There’s a greater need for young people coming in. We’re seeing pockets of that happen across the industry, but by and large it’s not. It’s going to create an environment where they’ll be far greater need than there are a number of advisors.

That’ll be a good thing for a small number of forward-thinking advisors who have built scalability into their business which will allow them to service and provide meaningful advice to a larger number of clients, but that’s a smaller number of advisors that are practicing now versus the bulk of the industry.

Patti: That’s interesting. Why do you think that is? Sterling, why aren’t young people coming into the industry?

Sterling: I’ve talked about this before. There’s a couple of different reasons. Either they incorrectly perceive it to be a sales business or they believe somehow incorrectly that financial services is in some way corrupt or they had zero exposure to financial literacy.

I think those factors over time, with more education, with more knowledge, with more exposure, it’s a great business. You can make a great living, you can help people, and you can build a great business at the same time. I think over time it will correct, but right now the industry is facing that demographic crunch.

Patti: You weren’t involved in this conversation at the Hall of Fame reception, but we were having a conversation with a group of us and it was telling to me that the observation is that the young people want to go in to investment banking versus financial services. What they don’t realize is, there are a lot of similarities between the two.

Just the words that we use and how we explain what different career paths they’re all about, it can influence these young minds who may be much better served and have a greater career potential and just a wonderful life doing one versus the other.

Sterling: Absolutely. There are so many facets of wealth management. It’s hard to pigeonhole it around one particular type of business or type of activity. The functions within a business like yours include financial planning.

They include capital markets and investment management, portfolio construction that also includes business fundamentals, the ability for you to market, grow your business, allows you to have the opportunity to strategically reinvest in at higher better people, create better client outcomes. It’s a vital function.

No matter what you’re into as long as you like the idea of being involved in financial services, there’s a role or a function for you related to wealth management. A particular area that I think there’s going to be huge growth moving forward is around technology.

As more FinTech, Financial Technology, becomes available for advisors to implement within their business, the importance of people who understand technology and how that can overlay with human advisors to merge the digital and analog experience, that will be profound.

There’s a huge opportunity there as well where we just need to get the word out, and so more young people can understand all these different facets. Being an advisor doesn’t mean one thing. It could mean a whole lot of things.

Patti: That’s such an important point, the technology aspect of this business. One of the headwinds in any business, especially, this business, it’s labor intensive.

Sterling, if we are going to do this right, you need bodies and you need smart people who understand not only how to a read a tax return, but also strategic ideas that can make a difference there versus portfolios construction versus estate planning, and helping a business owner transition their business to the next generation or to their employees.

There’s so many different things that we all have to know. Those pockets of opportunity exist in any firm that’s looking at providing real financial management, wealth Management on an ongoing basis.

Sterling: Yeah. That’s what we tell advisors. The advice that we give to advisors is, you have to find ways to drive efficiencies in your business. You have to create scalability. If in the future as an advisor, your business is going to be predicated on your ability to have deeper, more meaningful conversations with clients, you have to create efficiencies and processes across the business.

Technology can be a huge lever there. As you’re applying technology both to the back of the house solution so to speak, portfolio construction, tax planning, all of these multitude of different functions that exist and in the front of the house, to create mobily, served, client communications, digital aggregation of client assets, all of these different facets to enrich the client experience.

It takes someone who is cognizant on the way that technology can be built into a business.

Patti: It’s a great point. 10 years ago, 15 years ago, when we wanted to update a financial plan, we were basically starting over, re entering all the data, etc. I made the investment years ago to invest in a platform where all of the assets are being updated every single night.

We have alerts and alarms so that any issues bubble up to us, so that we’re always aware of both the risks and opportunities for every individual client and their family. That’s made a huge difference because, again, ultimately, it’s about the client experience and their outcomes.

Not only are their outcomes improving because of this software and this major investment, but also our ability to help more people is greater as well because it takes less time, it’s less manpower. Yes, I have a lot of employees, but it just allows us to serve those people and it’s the technology that ultimately makes the difference.

I think for advisors who may be listening, to also share that with the clients so that they can see it. That’s where the client experience really comes into play.

To say, “Hey, on my phone I’ve got this app that Patti put together for me. I can log in anytime day or night, see where I stand, and see how I’m tracking”. It’s just a wonderful thing to be able to provide to our clients that we didn’t have 10 years ago.

The technology is just getting better and better and better.

Sterling: Yeah, absolutely. There’s going to be more and more need for that.

Also, another area where we’re seeing growing interest in applying technology is around cybersecurity. Huge area of importance for advisors to think about, but there’s great technology emerging for advisors to utilize to help reduce the risk.

Patti: Well, Vince happens to be in this room right now. He is my cybersecurity guru. Believe me, every computer, every phone, everything has his software on it that really keeps and protects us.

The firewalls. I don’t know. With Vince, I think we probably have 10 firewalls, but that’s important because it’s important for me to know that a client’s information is secure and it’s important to the clients too. It’s a weird world out there, isn’t it?

Sterling: Well, it gets back to this notion of growth. The importance of growth for an advisor’s business because it affords you the opportunity to reinvest in processes. To hire someone like Vince to look after cybersecurity.

To have a chief technology officer that’s implementing the software and systems that can drive those efficiencies in your business. To hire better people, better technology, growth is necessary for that.

Patti: What it does, at least for me, Sterling, and hopefully this is…ultimately at the end of the day, is how does the client benefit? How does the client benefit? There’s more transparency. They always know where they stand and to be perfectly honest with you, it frees my time up.

Where I have more time to do what is the most important thing and that is talking with everybody, meeting with clients and really making a difference on an ongoing basis all the time. A lot of the work that we do – and I think you’ve seen this in your research – a lot of the work that we do, clients will never see, but that’s the point, isn’t it?

Sterling: Yes. It’s the multitude of things you’re doing behind the scenes to make sure that they’re having an optimal position for their investments from a tax standpoint, from estate planning standpoint, wealth transfer. All of that requires so much work in the background that often clients don’t see, but it’s necessary work to create that positive outcome.

Patti: What I think is terrific, if I may say, and this is not anything you’re expecting me to say. What I have noticed over the years that I’ve been fortunate enough to be involved with Barron’s is what you guys have done to elevate the standards for the industry.

Just by talking the way you’re talking now and for giving those speeches that you give at your conferences, the people in the audience and the industry is listening because you have that vision. You have access to all the data, the algorithms, and you have this way of articulating it, such that you create this image of something that we all want to be.

It’s just inspiring, Sterling. I know that you didn’t expect me to say that, but I appreciate all the hard work. You travel all over the place, you’re meeting with advisors and their firms and just saying, “Hey, here’s what we’re noticing and here’s not only the people that are growing but here’s why,” so that we can craft our businesses.

I often tell the story of one conversation I had in Florida with another advisor. It was just when I was getting involved with Barron’s. She shared something with me that has made all the difference in my business.

It was something in terms of how she measures her own progress, and the way that she measured her own progress was new money. Folks, I want you to know, I don’t care about that. What I care about is, are we taking care of our existing clients? I always was hyper focused on retention, take care of our existing clients.

As you know, Sterling, I closed our doors in 2009. We did not accept new clients because I just wanted to make sure that our existing clients were OK. We needed to get them through it.

In this conversation, the new money idea was like, “Wow.” She told me, “I brought in so much new money, what have you.” I said, “Well, how was retention?” She said, “Our retention was still really great.” Those two metrics are something that I have been measuring ever since.

When you leave today, remind me to show you our board. There’s a number on it. It’s the new money. The reason why I think it’s relevant is because if we’re doing a good job, then people are going to feel comfortable when they retire.

If they’ve got money to invest, they’re going to add to their existing portfolios. Then that says something. If they are happy and they’re telling other people, then they’re referring their friends and colleagues. The most important number that I measure will always be retention.

We are almost 100 percent, we’ve had a couple people pass away…but we don’t lose clients because to me, our clients are the most important thing, and that’s something that you guys look at too.

Sterling: It’s great that you do that. Thank you for the nice words. I appreciate that. It makes me feel proud about what we’re trying to accomplish at Barron’s. It’s not growth for growth’s sake, it’s growth for the sake that it affords you the opportunity to strategically reinvest in your business, hire better people, get better technology.

It’s a robust business that’s attracting the best talent in the community, as well to come and work for you. It’s a vital barometer of the vitality of your business and your ability to continue to drive better client outcomes and to provide good advice. It has to be a robust, thriving, growing business.

One metric managing it as a CEO is around, that net new inflows and it speaks to the businesses’ ability to attract, win and retain long term client assets. That’s a key facet that we look at in our ranking methodology, that organic growth component that advisor’s able to exhibit over a long period of time.

We don’t want to reward salesmanship because if money’s coming in the front door, but it’s going out the back door, there’s an empirical tell to that as well. What we want is advisors who are organically attracting, winning and retaining long term client assets.

Patti: You know the one thing we don’t measure? Is the money that is being distributed out. I don’t care. That’s what we’re here for. My goal is when clients invest money that when we return it to them, we’re giving them more. Period. End of discussion.

How much is going out doesn’t matter. That’s our business model. That’s what we’re supposed to do. It is important to your point though, that as a company we do attract new assets because we do need that scale.

If we don’t have that, then I can’t hire the attorney that I just hired, so that I can talk to him about this trust that I’m reviewing to make sure that what I’m reading is what is the case, and how the kids would be affected by the words that are in this paragraph. It’s wonderful to be in a position to be able to do that.

I’ve always believed real financial planning is very labor intensive, and honestly, it’s quite expensive. A lot of people might not realize everything that goes into this business. You mentioned in the previous podcasts, the cost of regulation and what we have to do to maintain compliance.

I think compliance is good business because it forces us, not that I need to be forced, but it forces us to have good business operations, good checks, and balances, and run a good clean business with full transparency, etc. That’s what the regulators ultimately want.

Again, this is an aside, but we go through audits. I have an attorney, we go through mock audits every year, but we were audited by the SEC.

Sterling: As all advisors are.

Patti: Exactly. It was a very interesting experience because it was much more of a collaborative. They were surprised how much I was interested in, “Tell us what we’re doing right. If you see anything we need to improve, just let me know and we’ll do it.”

They gave us a couple of ideas in terms of systems that make that process of the daily, weekly, monthly, and annual compliance protocols much easier, and I appreciated that.

Sterling: Think about record keeping as one example of an area where technology can greatly help that regulatory compliance factor. A record keeping’s grown enormously complex in the digital age. Just having insight and getting guidance on how to manage that in a less time consuming way is vital.

Patti: Sterling, I just want to thank you so much for everything that you have done. I want to thank you for being on this podcast today and for making the trip down from New York. All I can say to you is, please keep up the good work because you’re making such a difference for Americans by giving them access to great advice.

Whether it be with Barron’s digital or the Barron’s in education, or for letting them know that there are great advisors in their state that they can help and make a difference, a good advisor will pay for themselves. I believe that.

It doesn’t always happen, but a really good advisor could really make a difference and help Americans accomplish their goals at a time, going forward, that it might be much harder than it has been in the past.

Sterling: Patti, we still believe good advice can save the world.

Patti: Absolutely.

Sterling: Thank you. It’s always a pleasure being here.

Patti: Let’s go save the world together, Sterling.

Sterling: [laughs]

Patti: Thank you so much for joining us. For all of you, thanks so much for being with us today. I hope you’ve enjoyed it as much as I have. Any questions, go to our website at keyfinancialinc.com.

Until next time, I am Patti Brennan. Thank you so much for joining us. Thank you so much for telling other people about this podcast. We’re here. Literally, my goal is to make a difference in your life and the lives of the people that you care about most.

If you liked what you heard, share it with others, share it with your advisor. We’re here to make Americans financially secure. Thank you so much. Have a great day.

Ep36: Economic Forecast for 2020 and a Look Back at 2019

About This Episode

With another year under our belt and a new decade beginning, Patti sits with her Chief Investment Officer, Brad Everett, CFA and reviews some of the key market events from 2019 as they look forward to 2020. What should investors be most concerned about and are we headed for a market downturn? Are other global economies leading indicators in what can happen here in the US? Patti and Brad break it all down in their forecast for the new decade!


Patti Brennan: Hi, everybody. Welcome to the Patti Brennan Show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best life. Joining me today is Brad Everett. Brad is our Chief Investment Officer here at Key Financial.

Brad, thank you so much for making the trip.

Brad Everett: Hey. Good morning, Patti. I work about 15 feet away, so today I had to leave about 30 seconds before I had to be there.

Patti: That is one heck of a commute, Brad.

Brad: We have a nice studio here inside of Key Financial. I had to walk around a delivery of printer paper but it’s a pretty convenient trip.

Patti: It’s plug and play. Folks, for those of you who are listening today, we have wonderful privilege of having this studio that has been built in here, right here at Key Financial.

It allows us to really come in here whenever timely issues are coming about. We can just come in here, have a conversation, and share with all of you. Thanks so much for tuning in.

Brad, today, we’re going to talk about the backdrop going into last year, what happened, and then what do we expect going forward. You’re just coming back from a bunch of conferences. I’m really interested to hear what you’ve learned from other experts throughout the nation.

Let’s first talk about what was going on this time last year. 2019 wasn’t supposed to happen, was it?

Brad: Yeah, it’s hard to understand 2019 without talking a little bit about 2018. If you remember, the first three quarters of 2018 were wonderful. Everything was up, up, up, up and up.

Patti: Rosy.

Brad: Then you go into the fourth quarter where you have what had been two years of rising interest rates completely reversed, daily talk about trade war and tariffs and things like that. The corporate tax cut, which this giant, single one time boost in bottom line profits.

Patti: That’s a really good point. That’s like a shot of adrenaline, increased profits. What do the companies do with the money? That’s the question that I always ask is, growth has to be sustainable.

Here they have a wonderful shot of higher profitability. That would warrant higher stock prices, right?

Brad: Sure.

Patti: What do you do the next year?

Brad: I guess all of these businesses that had this one time boost of cash at the end of the year get to make a decision for what the highest and best use of that cash is.

Do we give everybody a raise? Do we hire more people? Do we build a factory? Do we put R&D into a new product, or do we give it back to shareholders?

I think that tended to be a pretty popular choice, was to buyback stocks, and you can do a one time cash dividend. Almost the same thing would be to buy your own shares and drive the price up that way.

Patti: You drove up the price, fine and dandy, but then you go into the next year, which is 2019. Of course, the stock market is going to take a look and say, “OK, Apple and IBM and all you wonderful companies, what have you done for me lately? I need more, and more, and more.”

It would be reasonable to say, “I’m not sure what I can do to give you more earnings.”

Brad: Yeah, buyback doesn’t generate any kind of future growth prospect.

Patti: Yet, earnings did come in higher last year. It is really interesting how resilient our economy has become. Now, manufacturing hasn’t done so hot.

Brad: Right.

Patti: That was on the decline and that would warrant what happened in 2018. Through the year, then we had this thing with the yield curve.

Brad: Sure.

Patti: This terrible, awful thing that everybody is worried about, the inverted yield curve. All the drama, and yet, the stock market continued to power ahead.

Brad: Yeah, absolutely.

Patti: One more thing, the United States President gets impeached. Again, everywhere we looked, it was bad news, no matter what you looked at. What does the market look at, and why does it power forward when all that bad stuff is going on?

Brad: Sure. That’s a great question. [laughs] I wish I knew the answer.

Patti: Actually, it’s so interesting. This is why, Brad, you’re so good. We don’t know the answer, do we?

Brad: Right, or certainly, what’s going to happen, and what it means for the next three months or six months or a time period so short.

Patti: Exactly. The most important thing that we believe, and I think what you’re saying is, nobody understands why markets do something over short periods of time. Fundamentally, longer periods of time, and we’re talking years, folks, markets do make sense.

Brad: Yeah, and I think you could probably go back and show that the market almost always reacts to short term news.

Patti: That’s a good point. Going back to 2018, that massive drop of almost 20 percent was pricing in a recession.

Brad: Yeah, it just hasn’t happened yet. Now, we’re almost pricing perfect news for the future. Evaluations are so high. It feels like nothing could go wrong.

Patti: We talked about headlines, and we talk about the media, and all the negativity, etc. I think it’s fascinating that one statistic that you got from the conference about the “New York Times” and the fact that they had 80 articles about a pending recession in August alone.

Brad: When the yield curve flipped, they apparently had 80 articles about a recession that just hasn’t even happened yet.

Patti: That was in 2019. The market was already doing well. What else do you think led to the market doing really, really well? We’re going to talk about whether or not that’s unusual, anyway.

Brad: Again, there’s a tremendous overreaction in the short term. When you look at the returns in the market, you just have to spread them out. If you look at 2018, great start to the year, terrible end. Most moderate portfolio is probably down a little bit.

If you include a great 2019, if you smooth that out, you’re probably seven percent a year, eight percent a year. You can do that over decades too. If you look at the 2000s, you have this last flat decade on the S&P. If you look at 2010s, they’re averaging 13.8, 13.9 percent. Amazing what the average of that is. It’s just less than seven percent.

Patti: How about it?

Brad: Year to year, it’s really tough to pinpoint exactly how the market’s going to react to everything. 2019 wasn’t out of the ordinary. I saw a stat that, in the last 93 years, 34 of them, the S&P earned 20 percent or more.

Patti: That’s pretty traumatic. A third of the time it earned.

Brad: It’s really not uncommon.

Patti: Let’s look at the other side then, Brad. How many times did it lose 20 percent or more?

Brad: It’ll be six.

Patti: Out of 94 years, that’s amazing. A third of the time, it’s up over 20 percent. It’s only lost more than 20 percent, six times.

Brad: 74, 75 percent of the time, the market is up, the S&P in particular, in this 93 year sample. If you think of, call it 70 years that the market was up during that time, 34 of them were up 20 percent. Over the years that the markets up half the time it’s up 20 percent or more.

2019 is not extreme. It’s not out of the ordinary. It’s not very uncommon at all.

Patti: Yet, to your point, it’s priced for perfection right now. We have to be cognizant of that. Just because it happened doesn’t mean it’s always going to happen certainly going forward as well. We always get back to the fundamentals in terms of “Price for perfection. What does that actually mean?”

Brad: Just an extreme optimism. What is on the horizon that could actually go wrong? You might be underestimating some of those risks.

The starting point is a really important input, it’s hard to look at the next 10 years and say, “Starting where we’re starting, could we possibly duplicate the past 10 years?” You would think that’s a pretty low probability.

Patti: Well, we will get into the predictions. Far more relevant would be looking around the world and looking at what our Federal Reserve is doing versus the ECB, etc. Seems like the Fed is on pause?

Brad: Yeah, it does seem so.

Patti: Last year’s quick turnaround, the Fed pivot. How unusual is that?

Brad: Very unusual. I don’t recall any times where that’s happened like that.

Patti: We’re laughing, you guys, because we were talking about this before when we went on air and we said, “Brad, it’s crazy that the Federal Reserve decreased interest rates, and we didn’t even have a recession.” It’s very, very unusual for them to do that that quickly, without a crisis going on.

Brad: They would tend to weed it out and see, rather than just immediately switch strategies that way.

Patti: You wonder whether or not President Trump mocking the Federal Reserve and pushing them had anything to do with it.

Brad: Nobody wants to be mocked on Twitter. I don’t.

Patti: I wouldn’t want to get in his way. No way.

Let’s talk about the Federal Reserve. You were talking about one of the conferences and somebody was saying that, “Quantitative easing was more like a steroids.” It wasn’t really like medicine.

Brad: Right. I think the idea being, back to what we were talking about before, did they put a boost into the economy that just can’t be compounded or sustained? I don’t know. What do you think?

Patti: I disagree with that, completely. I disagree because what the Federal Reserve did when they lowered interest rates and introduced this new tactics called quantitative easing, did it feel like it was a Wizard of Oz moment? Maybe, maybe not.

What I think it really did was shore up confidence. They were there to save the day. So the American consumer said, “OK. I’m going to breathe a sigh of relief and I’m going to go out there and spend money again,” which is really what they needed to do.

Brad: We’re really relying on consumer spending now, which, obviously, starts from consumer confidence. That is certainly an important input.

Patti: Let’s talk about this concept of Japanification. Everybody is worried that because Japan has been in this 30 plus year of decline…I started in the ‘80s, Brad. I was over in Japan.

At that time, everybody was worried that Japan was going to take over the world. At one point, they bought Pebble Beach Golf Club. They were buying things in New York City as well.

This concept of Japanification is a scary one, because back then, if you look at the Nikkei index, it was at 1989, it peaked at 39,000 yen. It is still 39 percent below where it was over 30 years ago. I have to double check my math, but that would really give us a very low Dow Jones if that ever happened here in the United States.

Brad: Even if it happened, it’s scary enough if it happened instantly and started growing back. This is 30 years later, it’s still down there.

Patti: Exactly. It is pretty scary. Just to give you an idea, folks. In 1989, our Dow Jones closed at 2,590. We are close to 28,000 now.

Brad: 10, 11 times more.

Patti: It’s crazy. Yet, they are 40 percent below where they were then. That just gives you a feel for the dramatic difference in two very developed nations.

That is also what everybody is worried about because Japan was hit with deflationary spiral that they couldn’t get themselves out of. They have negative interest rates.

Europe now has negative interest rates. People worry, “Europe is next. Then maybe the United States is coming close behind.”

Let’s talk a little bit about that whole concept of Japanification and really brainstorm. Do you think it could happen here? Is that something that we should be worried about?

Brad: The thing that comes to my mind that one of the major things they’re suffering from is demographics. They’re just a workforce that’s not growing, declining probably. Inflation that has been stuck very low for very long time.

Patti: Let’s talk about that. Everybody things of inflation being bad. By itself, it is bad, but this whole concept of inflation, what happens to a consumer in a deflationary spiral?

Brad: Sure. If you were a consumer that wanted to buy a new sweater and you knew it was on sale for the next week, you would rush to buy the sweater. But if you knew that the price of the sweater was going to be the same or cheaper six months from now, you might just wait. There’s no urgency to spend money.

Patti: Which is different than what we have here. Everything is always on sale. Hurry up. You see it in the department stores. You better get it now. Otherwise the sale is going to be over, so people do tend to consume it.

Brad: Yeah, absolutely.

Patti: I think that the demographics are fascinating also. I think it’s important to consider just where the government stands in terms of its ability to help, because clearly decreasing interest rates isn’t enough, is it? There is a question as to whether or not it even worked. What’s the next step?

Brad: There’s two major components in the GDP growth. Productivity growth and population, or workforce growth. I think productivity seems to come in first. You invent a car and people can drive farther and quicker to work. You have a computer and it comes with another burst.

Productivity doesn’t skip along at two percent. Not every worker is just exactly two percent more productive every year than they were the year before.

Patti: That’s a really good point, Brad.

Brad: There’s something that comes along and shocks it up, and then it kind of stays the same forever. The thing that seems to be the most pliable would be demographics. In our case, it’s a little different.

We have some political battle that we need to figure out, some kind of legal immigration. As long as United States citizens are having kids at a very slow rate, we need to replace employees somehow. We’ve got to figure out a way to do that in a productive way.

Patti: What’s the replacement rate that is required in order to keep an economy growing?

Brad: Oh, jeez. I think 1.7 per household or 1.8 per household or something like that. It’s not 2, but…

Patti: We’re right at that point, right?

Brad: Pretty close or just below.

Patti: Whereas Japan and Europe is a little bit below that. They’ve got some issues when it comes to demographics because younger people buy more stuff. They need more things, etc., versus people who are retired and older. They need more services, yes, but they don’t need the goods. Who’s going to manufacture? It has a real domino effect, doesn’t it?

Brad: Yeah. I don’t think it’s permanent in our case either. This might be a place where we differ from Japan. We’ve got a block of millennials that’s probably larger than the baby boomers. They’ll have kids. They’ll have lots of kids. That’s a workforce in itself, but their kids aren’t going to start working for another 20 years.

Patti: So there’s going to be a lull?

Brad: Yeah. It’s not something that you can never pull yourself out of. It just could take a little bit.

Patti: That’s interesting. In the meantime, in order to avoid that from happening, an economy can lower interest rates or they can have some fiscal stimulus. Get the government start spending some money. That certainly helped during the depression.

The problem is that Japan is not in a position to do that. They are the second highest developed country relative to death to GDP.

Brad: What did you tell me? It was 235 percent or something?

Patti: Yeah. It’s a crazy number. 234 percent, whereas Germany is at 59 percent. Germany is in a much better place to spend some money to get some things going and get growing again.

Brad: You would think they even have a better borrowing capacity than we do and a lot of the European countries.

Patti: They certainly do, because we’re at 106 percent. We’re not Japan, but we’re certainly not Germany. They are in a position to be able to get their economy out of it if they just have that political will to go ahead and allow the debt to grow a little bit just to get things moving.

Brad: Has that been part of the conversation? Is that being addressed?

Patti: Yes and no. I think they are still in this mentality of back to the depression and the breadlines and stuff, they don’t want inflation. I think they’re beginning to realize that deflation is actually worse. We know how to get out of an inflation, it’s the deflation that is really very challenging.

It’s really hard at this point to increase interest rates. It’s just not happening. They’ve got to do something else. They’ve got 19 countries over in Europe that all have to agree on this.

Brad: Right.

Patti: It can’t all be Germany, even though Germany is the largest. There are some things because of that alliance, in terms of exporting to other nations, exporting back to the United States. There are solutions. Again, it comes down to the will.

Brad: Right.

Patti: We’ve talked about that. Now let’s talk about India. India’s an interesting country, isn’t it?

Brad: Sure. It could be volatile, it could take a long time, but they’re a bright spot.

Emerging markets are interesting. They don’t have to reinvent the wheel. Developed nations have implemented the things that it takes to become a developed nation.

The technology exists. The ideas have been proven to work or not work. With an emerging market, it’s just a case of implementation. You just have to get the money, and the tools, and the labor force trained. You just have to get them there.

Patti: The one statistic that you shared with me, in India there are a billion people getting skilled.

Brad: Yeah.

Patti: That’s pretty dramatic. Again, skilled workers is a huge driver for GDP, isn’t it?

Brad: Yeah, absolutely. Think of the brains that are there. I’m always fascinated by this stat, the top 25 percentile of intelligence in India, just the smartest quarter of people, is larger than the entire United States.

Think of the potential that’s there to create wealth and productivity.

Patti: Right. To take that one step further, we think in terms of capital and getting them the tools, right? A billion dollars of capital in the United States is one thing. A billion dollars of capital in India is quite another.

Brad: Yeah, because you’re starting from a lower denominator. Absolutely.

Patti: The leverage that could produce in terms of the growth in India, and what that could do. There are different pockets in the world that really do present some interesting opportunities.

Brad: Absolutely.

Patti: I guess it depends on their willingness to bite the bullet, spend the money, and really jack things up a little bit.

Brad: Yeah, there are different intricacies of each one. The legal systems aren’t the same, the political atmosphere is not the same. There’s a lot of stuff to work through.

Patti: So, we’ll be volatile until they do, right?

Brad: Sure, yeah. Absolutely.

Patti: Brad, let’s take the last five, ten minutes and talk about what’s happening in 2020 and the presidential election.

Brad: Sure, I guess there’s a lot of ways to think about it. Obviously, it’s a polarizing time, you would think. It’s interesting, Phil Camparelli used a Joe Torre line. He said, “Every season, a team wins 50 games and they lose 50 games, it’s the middle 62 that decides how the season ends.”

That’s an incredible political metaphor. In any election, 35 percent of people are always going to vote Democrat, it doesn’t matter who the candidate is. 35 percent of people will vote for a Republican, it doesn’t matter who the candidate is.

There’s a group of people in the middle that is not so one sided, either way. They’re willing to rethink it every year, they have specific issues that they care about at the time, and they pick the person that they think is most capable of solving those problems at any given time.

The question is what are they going to do, right?

Patti: If things are stable, that middle group, they’re fully employed, they’re making money, their 401k is going up. The question is, and we always go back to that quote, “It’s the economy, stupid.” Right? It’s the economy, the economy, the economy.

Trump is not stupid, right? He didn’t get there without something going on upstairs. He knows that trade wars are bad.

Brad: Yep. War with Iran is bad. All the things that could propel you into recession, I think you would probably try to avoid for the next few months.

Patti: As we record this, here it is the middle of January 2020, we don’t even have enough time to go into a recession.

Brad: Yeah, by definition I guess you have to wait two full quarters of data, so you would never have enough time to get the information that you get officially say that you’re in a recession.

Patti: I think we can all agree this hasn’t been the standard presidential style. The leadership style is very, very different.

Even though the economy is humming along quite nicely, tax rates are low, things are doing very well, there seems to be a group in our population, that are saying, “We just have to get rid of this guy.”

It seems to be more for personality, his personality traits, and Twitter, and all that kind of stuff. The question is, are there enough of those people in the middle to sway the election one way or the other?

Brad: Right. Yeah, it’s hard. I guess the way I tend to think about it, and this may or may not be true, but it feels like that group in the middle would prefer stability, like the same thing. What’s the last one term President? Was…

Patti: George Bush?

Brad: …Bush. Yeah, right. There is a tremendous boost for an incumbent against a challenger. It’s very rare that that person loses.

Patti: At the end of the day, Brad, does the President really matter?

Brad: I tend to think that the President is our PR man. He is the PR man for the country.

Patti: Oh, boy.

Brad: You think a business cycle is far longer than any President’s term.

We hit a bottom in 2008 and 2009, and this economic growth isn’t because of Obama. It’s not because of Donald Trump. It spanned both of theirs. It spanned a Democrat and a Republican.

The economy does what it does. The business cycle does what it does, and it’s going to go on despite whoever’s in the White House.

Patti: Let’s wrap this up and think in terms of action items. Given this, given 2020, what’s already…We look back, 2019 was a great year.

2020, we’ve got some headwinds, we’ve got some international conflict, the presidential election. Things seem to be humming along, but we shouldn’t get complacent, right?

Brad: Yeah. I think this should just serve as a reminder that the stock market is a volatile place to be invested. It’s intended for long term money.

If you need money in six months, we shouldn’t be trying to figure out what stocks are going to do, anyway.

Patti: Exactly. Bonds, don’t give up on bonds, but don’t expect bonds to do what they did in 2019.

Brad: Yeah. You’re not going to get a result net worth of 15 for very many years in a row.

Patti: Yeah, that’s not supposed to happen. That’s not a typical return.

Again, we just go into these things assuming coupons, two, three percent, we’re happy with that. It’s a nice buffer.

Not great for income if you’re really looking at it as an income oriented strategy in retirement, but it’s important to have that, as well.

Brad: Yeah, you’re exactly right.

Patti: Well, Brad, thank you so much. This has been fun.

I know you’ve got a long commute home, back to your seat. Hit the pavement.

Thank you so much for joining me. Thanks to all of you for joining us as well.

If you have any questions, please feel free, go to our website at keyfinancialinc.com. If you want a transcript of today’s show, it’s all there.

Until next time, I’m Patti Brennan. I hope you guys have a great day.

Ep35: Top Estate Planning Tips with Bob Cohen

About This Episode

Patti welcomes Estate Planning Attorney, Bob Cohen, a partner with Riley Riper Hollin & Colagreco to discuss his best recommendations for clients looking for estate planning assistance. Bob will explain which documents are key in protecting your assets for your loved ones – whether you have millions of dollars or not! Listen now to learn about the benefits of living in Pennsylvania and working with professionals that understand the state and federal tax liabilities involved in estate planning.


Patti Brennan: Hi, everybody, welcome back to ‘’The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Folks, that introduction is an introduction I do for every podcast and as you listen to this one in particular, you might think “Oh, that doesn’t apply to me, I don’t have millions and millions of dollars.” OK, stay tuned in because what Bob Cohen has to talk about applies to everyone.

Bob, welcome to the show.

Bob Cohen: Thank you, Patti.

Patti: Why don’t you tell everybody a little bit about your background, whatever got you into this field of estate planning you don’t know that I’m going to about to say this you all should know, he’s one of the most respected estate planning attorneys in the Philadelphia area.

When it comes to this, he is the best, or one of the best. Thank you so much for joining us.

Bob: Thank you for that kind introduction. By way of background, I’m an attorney with Riley Riper Hollin & Colagreco. I’ve been with the firm about 17 years. I’m a partner in the firm and I head up our estate and tax practice group.

I got into estate planning about 20 years ago. It was transitioning from doing litigation actually, into estate planning for more of a work life balance, believe it or not, because litigation required me to travel all over the country.

I had small children at the time and wanted to find a practice area that would allow me to utilize not only my skills as an attorney but my prior skills as a CPA and a former controller for our division of a Fortune 500 company.

Patti: OK, so you’re one of those guys that has more letters after your name than in your name, right?

Bob: That’s true.

Patti: I do think that your litigation background probably serves you, if in the event that you’re face to face with the IRS trying to argue a particular strategy and justify certain deductions.

Bob: I do a fair amount of federal tax controversy work and some state tax controversy work as well. In fact, I’m in the process of settling a case right now that’s scheduled to go to trial in January. The good news came out this morning that it looks like we’ve reached a settlement with the IRS on this matter.

Patti: Good for you.

Bob: Needless to say, the client’s very happy.

Patti: Yes.

Bob: That’s always our goal. To try to have a client have a good outcome.

Patti: Yeah, minimize the out of pocket cost. That is terrific and good to know that we’ve got that in your background. Let’s talk tax.

Bob: Sure.

Patti: Let’s talk a little bit about the federal estate tax, where it stands today, where it might be headed, and really, who needs to worry about it? Who needs to care about it?

Bob: If we take a little step back and we look at history for a very long time, the federal estate tax was a $600,000 exemption that most people had in that estate kind of dormant for a very long time.

The last 10 years or so, it’s had wild gyrations in terms of going up to $5 million, it went up to $10 million. For one year there was no federal estate tax at all.

More recently, we’ve been dealing with a more concrete law which says, “We currently have $11.4 million of federal exemption available to each individual.” That’s a lifetime exemption for both gift tax and federal estate tax.

Patti: In English, each individual can leave $11.4 million to the next generation or to people that they care about. They don’t have to worry about a federal tax of…Is it 40 percent?

Bob: It’s 40 percent on the excess over the exemption amount that is available. The exemption amount, again, has fluctuated. That $11.4 million is actually a number that has escalated based on inflation, but it is currently at $11.4 million for 2019.

It is an interesting law in that it is set to sunset at the end of 2025 and revert back to a five million dollar exemption. Therein lies the interesting planning opportunity for many clients.

Many say, “We don’t have anything close to $11.4 million,” or for a married couple, $22.8 million. Why do I need this?”

You may have five million or six million. If you are fortunate enough to live long enough and these laws revert back to the lower limit, you may suddenly be faced with a planning issue.

The opportunity exists right now to do some planning, providing flexibility in the estate plan documents so that you will have the ability to make decisions at a later date and some today.

For example, if you have a married couple who has $12 or $14 million they say, “We don’t have $22.8 million, we’re safe. We don’t have to do anything.” They may want to look at their lifestyle, determine what their needs are.

I always say, determine what your needs are first because you don’t want the tax tail wagging the dog, right?

Patti: Agreed.

Bob: We all want to save taxes but we don’t want to put ourselves in a financial situation that we don’t like, merely to save tax dollars.

Patti: There’s nothing worse than looking back and saying, “I wish I hadn’t done that.” Because in estate planning, once you set it up, it’s usually irrevocable.

Bob: That’s correct. Most of these types of planning, you do make an irrevocable type of decision in order to gain the tax advantage.

Patti: Some of the things that you and I’ve done together, I love the fact that you build in so much flexibility so that maybe husband and wife aren’t necessarily losing access to that money right away, or over the survivor’s lifetime, and that’s called the Survivor Lifetime Access Trust.

That’s a pretty neat planning tool that can take advantage of this, maybe inflated exemption, without losing access to the money that you might need later on.

Bob: In this situation, we’re talking about what we call Spousal Limited Access Trust. Assets are being transferred, but during the surviving spouse’s lifetime, has the ability to reach in, dip into those assets and utilize them when necessary.

Patti: That’s terrific.

Bob: The other thing that I wanted to mention, it’s important to develop the flexibility in these documents because there are multiple ways to take advantage of the exemption.

For example, there’s this concept called portability, where a husband and wife, a married couple…Today, we have same sex marriages. A married couple has the right to transfer any unused exemption to their surviving spouse.

Patti: If I hear you right, let’s go through a real case example. Let’s say husband and wife have five million dollars, don’t really need a estate planning, etc., but they have access to this portability clause. Husband passes away, wife wins the lottery.

Now, all of a sudden she’s got $20 million. Because they have the portability clause, she can actually leave a lot more to the next generation, right?

Bob: Right. We still have the concept of unlimited portability, if you will, between spouses. That’s not always the best type of planning, because if you just leave everything out right to your surviving spouse, when the second to die, that surviving spouse, could end up with a highly taxable estate, when much, if not all of it, could be eliminated or minimized by doing some planning.

We typically recommend to clients in that range of asset wealth to develop portability in there but also to allow the spouse to do what’s called a Disclaimer Trust, so that at the end of the first person’s lifetime, they get to get a second bite at the apple, so to speak, and they can look at what the current laws are.

They can look at what the health and needs are of this surviving spouse. They can make a decision as to whether or not to take some of those assets and fund a Credit Shelter Trust, put it away for the next generation, and avoid tax on it on the second to die.

Patti: Therein lies the flexibility that you are referring to, to not make it a mandatory, but make it at a game day decision based on the information they have at the time and when it’s most relevant.

Bob: We also recommend that the clients build that type of flexibility into all their documents. Sometimes it’s the will, sometimes it’s a living trust. Some of these are more technical than others, but they also provide opportunities. If proper planning is done, you can avoid probate.

In Pennsylvania, probate is not a big deal, but there is still a cost associated with it. Depending on what county you’re in, they usually charge X number of dollars per million dollars of assets.

You can do the math and see that if somebody that has $50 million, and if the county they live in charges $700 per million, that can be a pretty hefty probate fee that can be avoided by doing a living trust. Living trust allows you all the flexibility of a will, but you don’t have to pay that probate fee.

Patti: Let me play devil’s advocate here, Bob. Here we are in Pennsylvania. What is the exact process of this thing called probate? Is there a potential downside of a family not going through the probate process in terms of accountability or the trust itself?

Because the way that I think of a living trust, correct me if I’m wrong, but it’s a substitute for the will. Pretty much everything you’d put in your will, you put in your living trust.

One, will, you have to go through probate, the other one, you don’t have to go through probate. What are the pros and cons of each strategy?

Bob: When we’re planning with clients, we always talk to them about whether or not it pays to have a living trust. We always recommend a will.

Whether there’s a will or just a trust, we typically recommend that a will should be done. There may be a situation where you get assets after the trust has been created, and you didn’t get around to transferring those assets into the trust. Now, you potentially have an issue that you wouldn’t have otherwise had if you just had the will.

We always recommend doing a will, and we do what’s called a pour over will in most cases where there’s a living trust. We say, any assets that I may have that are titled in my name, that are subject to probate, we ask that you transfer them over…or we do not ask. We direct that you transfer them over into my revocable living trust.

Patti: In other words, it’s a, “Oops, I forgot about this account. I meant to put it in the name of the living trust,” which by the way, the living trust is in your social security number also.

Bob: That’s correct.

Patti: It’s really, from a tax perspective, same outcome. It’s a catch all of those things that every once in a while, we forget that there’s this account, and then, therefore, there’s no intestacy issue, right?

Bob: Right. We try to avoid intestacy issues because that can create challenges, and…

Patti: Hassle, cost, all of that.

Bob: Challenges by beneficiaries that maybe were not intended to be recipients of someone’s assets. It’s important to do planning regardless of the overall value of your estate, whether you have $500,000 or $500 million. There really are advantages to you determining how you want your assets distributed to your loved ones or to charity.

Patti: That’s a really important point, as I said in the beginning. You don’t have to have $12 million for this to be relevant. I think the distribution is really, who do you want to have what you’ve worked an entire lifetime to accumulate?

I think about that as, what a legacy. It represents 30, 40 years of hard work, sacrifice. When it’s all said and done, who would you like to hand that over to and when? That’s really the goal of this, right?

Bob: That’s correct. It’s really a hard decision and it’s a hard topic for people to focus on.

Patti: I don’t want to die. I don’t want to talk about it.

Bob: Nobody wants to talk about that subject. As part of overall strategy for planning, which is the business you’re in as well, Patti, you need to have the right team of advisors working together, all helping the client to reach their goals and objectives.

That’s one of the reasons I really enjoy working with your organization because we have a common goal in mind. There’s no egos involved. It’s what’s best for the client.

Patti: Exactly. Let’s talk a little bit. We talked about the federal estate tax. There is this wonderful opportunity between now and 2025. We’ve got five years to do some pretty cool stuff.

Bob: Maybe less.

Patti: That’s a good point.

Bob: I do want to point that out. While the law is fixed for this point in time…as we know, Congress at any time can enact new legislation.

Patti: And have.

Bob: And have and may in the future. Certainly, if there’s a change in the White House, the Democrats have certainly expressed an interest in reducing the overall exemption that’s available to the people.

Patti: I’ve heard rumors, Bob, of going back from $11.4 million, all the way back down to three million.

Bob: Three, three and a half million, are the numbers I’ve heard tossed around. Again…

Patti: You don’t know.

Bob: I try to avoid speculating on these things because it’s always a moving target. The best thing we can do is planning based on what we know the law to be, and again, providing as much flexibility in the documents as possible, so that we can adjust and adapt to what the law may be at the time of one’s passing.

Patti: The word planning, I wish that we could come up with another word for planning. This is a sidebar commentary. It sounds hard. It sounds complicated. I don’t want to go through all this, etc.

The way that you and I like to approach this, at least, based on the history is, “OK. What is your situation? Here are three potential ideas. Here are the pros and cons of each. Here are the implications, short and long term. What do you feel most comfortable with?”

Bob: Yeah. I think planning can say, “Oh, I don’t have enough assets to really worry about planning.” Your point is valid. I think what we need to do is, focus more on the individuals. To me, it’s a very important concept that any clients I’m representing feel comfortable with me, can share their thoughts and concerns with me.

Oftentimes, I’m getting into very difficult conversations with a client. “I have a child with special needs,” or “I’m worried about a spouse, or a child spouse.” How do we protect those types of situations?

Patti: Very important.

Bob: If you don’t have that trust with one another, it’s really hard to do this type of work. It’s a very personal relationship, to help in the situations.

Patti: It is very personal, especially with what’s happening in America today, kids are underemployed. They’re not quite earning, etc. I think also, what I often find, is the parents don’t necessarily want to create a disincentive for their children. They don’t want to take away their drive.

There’s some pretty neat things that you’ve done, to create more of an incentive, maybe more financial security for the children, but, encouraging them to go out and create their own wealth on their own, based on their own efforts.

Bob: We’ve done that with a number of families, particularly families that are second and third generation business owners, where the money that is accumulated from generation to generation goes into trust. It’s handled in such a way that, it’s not the silver spoon type of approach.

Oftentimes, these families will set up family foundations. They’ll set aside a chunk of money for that. They’ll ask the children to get involved in the family foundation, so they can understand needs in their community. They may have grown up in a very privileged environment. It’s a good way to help them learn about those less fortunate, and how to give back to the community.

Patti: Sure. Let’s talk a little bit. We talked about the federal estate tax. How about state inheritance taxes or state estate taxes? We could talk about Pennsylvania first, and then maybe we can expand more.

Bob: I would probably focus primarily on Pennsylvania because that’s really my primary area of expertise. That’s where I’m licensed. I’m licensed in both Pennsylvania and in New York, as well. Pennsylvania is a relatively simple procedure.

It’s Pennsylvania inheritance tax. There’s technically an estate tax on the books, but currently, they are not assessing any estate tax under Pennsylvania law. Federal Pennsylvania inheritance tax for a spouse is taxed at a zero percent rate. Any transfers between spouses has no tax associated with it.

For bequests to children, it’s a four and a half percent tax. For siblings, it’s a 12 percent tax. For anybody else, other than a charity, it’s 15 percent.

Patti: It can add up as well.

Bob: It can definitely add up. You are entitled to certain deductions in the course of administering the estate, to reduce that amount that is subject to Pennsylvania inheritance tax.

Patti: To get ahead of it, even if we don’t have a federal estate tax, what about avoiding the Pennsylvania inheritance tax? Is there…

Bob: Certainly gifting is one way to do that. You can be as simple as utilizing the annual exclusion amount, which is currently $15,000 per year, per person.

Believe it or not, when you have larger families, that can add up to quite a bit. If it’s a situation where you’re married, you essentially can give away $30,000 per year, per person.

Patti: Their spouse and their children.

Bob: Their spouses and anybody else they want to give it to. It doesn’t have to actually be a familial relationship to do that type of gifting.

I have clients that are literally giving away hundreds of thousands of dollars a year without having to file a federal gift tax return, without having to do anything other than documenting the fact that they’ve made this $15,000 gift to 25 people.

Patti: Aside from the will, aside from the revocable living trust as an alternative, different gifting techniques, etc., what other documents would you recommend?

Bob: I always have a standard basic set of documents that I believe everybody needs. You need some form of will either just a will or a pour over will, perhaps a revocable living trust if you’re using a pour over will. You should have a durable power of attorney which is a document that authorizes someone else to act for you during your lifetime.

People are sometimes familiar with a power of attorney. They may give someone to complete a real estate transaction. Well, this this one is one in which you are naming someone to act as your agent to do as you would do in a fiduciary capacity if you become incapacitated in some way.

Patti: They have that fiduciary obligation. They are accountable…

Bob: Right.

Patti: …so it is important.

Bob: Yeah, and two other documents that you should also have. One is a living will and a healthcare power of attorney because not oftentimes the person you name as your financial power of attorney may not be the same person you want making medical decisions for you, so we always recommend that they be two separate documents.

Patti: The living will and the healthcare power of attorney, you need both of those documents or are they one in the same?

Bob: The way I draft is I draft them as two separate documents. The living will expresses your end of life wishes. What do I want or what treatment do I want with health if I’m in a terminal situation, under current medical technology?

I do or do not want resuscitation. I do or do not want antibiotics. I do or do not want hydration and food. It is a bit of a morbid topic but most people, oftentimes, tell me, “I don’t want to do anything that’s going to prolong the act of my dying.” That’s the language that we typically use.

The healthcare power of attorney references that document so that people aren’t making counter decisions to what that individual may have had in their living will.

Patti: The healthcare power of attorney authorizes certain treatments, surgeries, things of that nature.

Bob: It authorizes, based on the person who’s signed it, an agent to make those decisions.

Patti: Let’s go back to the financial power of attorney, what is the difference between a durable power of attorney and a springing power of attorney, if any?

Bob: That’s a great question. A durable power of attorney, let’s say, I gave you my power of attorney, you would have the right to act upon the signing of that document. I would sign it, I give Patti Brennan my right to act as my power of attorney. You sign as agents and you’re going to accept that role, you can act…

Patti: At any time.

Bob: …at any time. A springing power of attorney, on the other hand, is the one that goes into effect upon a certain event. It could be becoming incapacitated in some way. It could be unavailable for traveling purposes. It can be very specific. It could be a limited springing power of attorney.

Patti: You’re recommending the durable, so let me play…

Bob: I recommend…

Patti: The power of attorney.

Bob: …a power of attorney, and I really have a discussion with the clients as to whether or not they want it to be springing or durable upon signing.

Patti: I think the reason for the question, Bob, and the distinction is that a lot of people, when they get their powers of attorney, they don’t realize there is a difference. When you’re giving me this power, how much power do I really have? When can I start using it? How are you going to know?

Does that create some unintended consequences? What are the penalties, if you will? I mean, let’s say I’m taking on the role of power of attorney. What responsibilities am I assuming? Who am I accountable to? Is it a lot of work?

Bob: The agent is taking on a responsibility. It’s a fiduciary role, similar to perhaps what you do for your clients, in terms of investing their money.

Patti: Fiduciary is a whole different animal, right? It is not just a suitability or you try to do the right thing. You must act in the best interest of that individual. End of discussion.

Bob: That’s correct. That’s absolutely right. There is no leeway there. You are actually signing a statement under Pennsylvania Law that you are acting in the best interest of that principal.

Patti: No co-mingling of the assets.

Bob: Certainly not. [laughs]

Patti: None of that funny stuff. You pay the bills. You take care of that person.

Bob: You’re opening yourself up to tremendous liability and risk by doing anything other than acting in the best interest of the principal.

Patti: It doesn’t really have to be that much extra work. You’re just taking care of the financial decisions and bills and that sort.

Bob: I don’t think it should be taken lightly. It can be a very benign type of role, but it also depending on the family situation and the amount of investments one may have. If, let’s say, somebody is managing or owns 47 properties, and suddenly they become incapacitated, well…

Patti: Guess what, you’re up.

Bob: …that agent could have a lot of responsibility. It should be someone that has the ability. It’s really important to think hard as to who you want to be that agent. It shouldn’t just be automatically your brother or you spouse. It should be someone that has the requisite skills for the types of things that might come up in your life.

Patti: And/or at least that person needs to have access to someone like you for that ongoing guidance that they’re probably going to want and need, right?

Bob: You always want to have the right team of advisors in place. I’ve always been a big advocate of that. No one person is going to have all of the answers. Very few clients, quite frankly, have all the answers.

Surrounding yourself with bright people that can help you and are willing to work together and don’t have egos, let’s all focus on getting the client to where they want to be and putting them in the best position.

Patti: Bob Cohen, I am so grateful to know you. I so enjoy working with you, because that is the spirit that you take every client meeting. Folks, again, this is such an important subject. In fact, we’re going to continue the conversation, Bob, if that’s OK with you.

Thank you for joining me. I hope this has been helpful.

If you have any questions, please feel free to go to our website. That’s at keyfinancialinc.com. We will have the show notes with all the different particulars that Bob has talked about.

We’re happy to hear about any topics that you’d like to learn about. Feel free, send us your cards and letters. Until next time, I am Patti Brennan. I hope you all have a fantastic day.

Ep34: Industry Trends with Sterling Shea – Global Head of Wealth Management for Barron’s

About This Episode

Sterling Shea, Global Head of Wealth Management for Barron’s, sits down with Patti to discuss the industry trends he is seeing at Barron’s and Dow Jones. In his 22 years at Dow Jones, he has seen the financial advisory industry evolve and he reveals what he believes to be the most impactful practices that the top-ranked advisors are doing on behalf of their clients. Patti and Sterling also discuss how these advisors are ranked by Barron’s and the importance of the rankings lists for the investor.


Patti Brennan: Hi, everybody. Welcome back to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

I have a terrific guest. I am so excited. Sterling Shay has joined us. He is the Head of the Global Wealth Management for Dow Jones and Barron’s. Sterling, I’m not sure what state or what country you have come in from, but welcome to the show.

Sterling Shea: Thank you so much, Patti. It’s a pleasure to be here. I live in New York now, but I’m a Chester County native, so it’s always a pleasure to come back to this part of the world.

Patti: Now, are you going to see your mom and dad while you’re in town?

Sterling: The sad part is, a lot of my family has moved away from this area. I still have a lot of affection for it. It’s so fun just driving around seeing the road names and all the old places where I grew up.

Patti: Yeah, that’s terrific. That’s terrific. Well, Sterling, I have something that I want to announce to you and to all of our friends out there. Ed and I have literally eclipsed a major milestone in our lives, 32 years. Something happened yesterday that has never happened before. You want to know what it is?

Sterling: Yeah.

Patti: OK, here’s the deal. For 32 years, I have been saving for my four children’s college education, and I wrote the last tuition check yesterday.

Sterling: [laughs] How does that feel?

Patti: Amazing. Now we still have our mortgage, that’s our next major milestone, but it really is. If I were to look back 32 years ago when Michael was born and look forward to this day, because that was always really important to us. I do practice what I preach, and that is real financial planning and really thinking about what’s important.

I think it’s so interesting to have you here today as the Head of Global Wealth Management for such a prestigious organization. I really want to talk with you today about what trends you’re noticing in the industry and what you’re finding with Americans today. What are the major needs?

Sterling: Sure, Patti, I’d love to talk about that. I hope your son doesn’t come back and say he’s found a nine year graduate school PhD program.

Patti: Yeah, you and me both.

Sterling: Might not be the last check.

Patti: If he does, he’s on his own. He’s got to have some skin in the game. All of my kids had skin in the game, so I thought that that was important so they really appreciated it. I sent the text out today, and they all sent a huge thank you, so it was very much worthwhile. Let’s talk a little bit about your career, Barron’s, Dow Jones.

You’ve had an amazing run. How did you ever get interested in journalism and what led you to this incredible role at Dow Jones now?

Sterling: Great. Thank you Patti, I’m happy to talk about that.

This is my 22nd year at Dow Jones. It’s been an amazing run, I’m really proud and excited about the opportunity I’ve had with the company. Dow Jones, if you don’t know it, is a publishing company that publishes the “Wall Street Journal” and “Barron’s Magazine.”

This is the 98th consecutive year of Barron’s magazine, which publishes weekly. Now it’s a global multimedia destination, publishing across print and online. We’ve really grown newsletters and all of the different channels in which we’re distributing content. Our sister publication, the Wall Street Journal, is designed to give you daily news and information.

Barron’s is publishing weekly, but provides a greater context and analysis and forward looking comprehensive market analysis.

Patti: That’s really interesting, that’s a great way to distinguish between the two, Sterling. The Wall Street Journal is, this is what happened yesterday, this is the markets, the economy, there’s some news, whereas Barron’s tends to take a deeper dive into real analysis and helping all of us, Americans, advisors, etc., understand not just what happened, but what we should do about it.

Sterling: Sure, yeah. Clarence Barron was the, interestingly, owner of the Philadelphia Stock Exchange at the time. He left that position and founded Dow Jones & Company and became publisher of the Wall Street Journal. He came out at that time with the idea that the Journal would give you news each day to help you live your life and make decisions.

Barron’s would be published on the weekend to give you forward-looking analysis while the market’s closed so that you can be prepared for the week to come and understand what was going to impact your investments and other facets of your financial life.

Patti: That’s terrific, that’s fascinating. What is really interesting is that you guys are breaking away from the pack. In other words, you are going digital and you’re really giving timely advice or at least guidance in terms of thought leaders in the industry, both in America as well as abroad.

Sterling: Yeah, we’re trying to be global in our coverage. We are constantly looking for new ideas to better inform investors. We want it to be a decision making platform.

It’s evolved a lot over its 98 year history. The print vehicle is still important to us, but we’re agnostic now as to how you access Barron’s content, be it through an app on your mobile device, be it through the website, or in print.

Patti: Given your history and given the number of years you’ve been with both organizations, is there anything that has changed or are there any trends that have surprised you?

Sterling: Yeah. When I started at Barron’s, I was on the commercial side of the business. I was in Boston at the time and a lot of my friends were financial advisors, other friends were in the financial services industry.

One of the things that fascinated me was it seemed like in the mainstream media, there wasn’t enough positive publicity around the good work that the very best financial advisors were doing. The mainstream media seemed to focus on the bottom one percent of the industry, bad people doing bad things, the criminal element, which really painted a false stereotype.

When we went out to meet with great financial advisors, we saw people of tremendous acumen and talent and passion trying to help clients have better financial outcomes. No one seemed to be telling that story. We looked at the opportunity of that to cast our spotlight on people who we thought were doing a very good job.

By focusing on the very best financial advisors that we would identify through a journalistic process, we would be able to tell a better story to investors and our readers to enable them and encourage them to find quality financial advice. That’s changed a lot over the two decades that I’ve been here.

We’ve seen that evolution and we’ve seen more attention being placed on the very best people in the wealth management industry. I think that’s to the betterment of investors.

Patti: I would have to agree. I think that what I am seeing, and I think that you are as well, is that there is becoming less of an emphasis on performance and investment management, and more of an emphasis on holistic planning. Is that what you’re noticing? Or should I say, maybe you guys, and I do think there is an element of this, you’re driving that, in a way.

Sterling: Thank you. I think we have a small role to play. I would agree with you in that evolution of the industry. I think the business of wealth management has changed from what was a performance driven, benchmark oriented process to what is more now of a client driven, outcome oriented solution. Sounds like a subtle shift, but it embraces the wider financial needs that a client family has.

One of the things we’re adamant about at Barron’s Magazine when we assess and rank financial advisors is we don’t consider investment performance as a metric, because investment performance should be a function of individual, client directed risk tolerance and investment goals. I don’t want to penalize someone for taking a very conservative client base.

The best advisors should deeply understand what their clients are looking to achieve, what the intent of their family’s wealth is, and build a portfolio, an investment approach, and financial planning and estate planning all around that individually bespoke tailored client need set.

Patti: That is really interesting. When you think about and when we look at the industry in general, you’ve got different segments. You’ve got the wirehouses, the Merill’s and the Morgan Stanley’s in that group, and then you’ve got independent, you’ve got family offices, private wealth managers. There’s different segments of the industry.

Is there anything that you’ve been seeing within each segment or in general?

Sterling: We’re agnostic completely as to the different channels of wealth management. Frankly, I see both excellence and mediocrity sprinkled across the business. There’s not one channel that’s better positioned or even, frankly, differently positioned to serve clients.

It’s more about the individual talents of a given financial advisor and their ability to communicate well, deeply understand client needs, and then serve those needs. In terms of the industry trends at large, regulation has impacted the industry. There has been a lot of necessary evolution of process within wealth management.

Wealth managers still have to get product, they still have custody their assets somewhere, they have to get services so then they can provide banking services along to clients. That’s changed and evolved, and there’s lots of nuances that and to your point, there’s 50 flavors of ice cream here that individuals can choose from.

That’s a good thing for consumers to have that robust choice, and I would encourage an investor who’s considering an advisor to meet with a lot of different ones. Worry less about the structure or what you might think you know about that particular channel of the industry. What’s much more important is the degree of trust and ease of communication between the client and the advisor.

Patti: One of the things that I’ve always appreciated about your conferences is that you are truly agnostic. I’ve had the wonderful opportunity of meeting people in those different channels, and they’re really good advisors.

The stereotype of the big Wall Street firm doesn’t necessarily ring true. They’re terrific people who do great work in those business models. It’s just the level of comfort, as you say, in terms of who’s really doing what they’re promising to do for their clients. It really comes down to the follow through, don’t you?

Sterling: Yeah. Again, it’s much more about the individual than the structure of the business. What our intent is, with the conferences that we host that you’re referencing, we try to bring the top advisors across the country together, to have an open and robust exchange of information.

We think really people who are at the top level of the industry see others in the industry more as peers less as competitors. The idea, if I can, as an advisor, share something that we’re doing to create better outcomes for our clients and build a robust business around that.

Then a rising tide will lift all boats. That exchange of information will raise the standard of excellence in the industry, and the end beneficiaries of that information exchange will be the clients themselves.

Patti: No question about it. For me, just going to the conferences, learning about the importance of teams, has really impacted the decisions that I’ve made in my business. We’re seeing it across the industry, aren’t we?

Sterling: The team thing is very important right now. We have strong conviction. It takes a village, and it’s going take a lot of people, a lot of resources, a lot of expertise, and various functions across an advisor’s business to deliver a superior client experience and better outcomes.

One of the things that we focus on our events is the business of being a financial advisor, propelling growth in your business, propelling profitability. We often get asked, I get asked by friends of mine and consumers that I meet.

“If you’re so geared towards creating this better outcome for clients, it’s all about the individual, about the client, why do you spend so much time in your business talking about growth and marketing and team development and that sort of thing?”

We believe, absolutely, those financial advisor businesses that are most likely to provide superior outcomes, better experiences for clients, better investment experience, are robust, thriving, profitable firms that can reinvest in the business, that can hire better people, build better technology solutions.

It takes a robust business engine to create that. Those financial advisor practices that are most likely to do subpar, have subpar outcomes for clients, are the ones that are struggling, unprofitable, and low growth.

We think there’s a direct corollary between the degree to which business is thriving and its ability to provide superior performance and superior outcomes for clients.

Patti: A lot of advisors went to school for economics or finance. They’re not necessarily business owner type people. It’s something that you learn as you go. To be able to have that format, to be able to do some brainstorming, find out what successful people are doing, and then just model it.

Sterling: Absolutely, and there’s no one right answer. There’s lots of different ways to approach this business.

That idea of the advisor graduating, becoming CEO of their business, and at a very high level orchestrating a team of people to both grow, develop, and reinvest in the business itself, that also benefits the clients because they’re creating that optimal experience, they’re reinforcing investment processes.

They’re leveraging technology within their firm to create a better, easier solution set for clients to engage with.

Patti: There isn’t a better time for that to be occurring than now as we’re learning more and more Americans are wanting a trusted advisor. You guys have algorithms for almost everything. I found it fascinating this year to learn from you, what’s really happening in the industry as it relates to this gap that seems to be occurring.

Sterling: There’s still some fundamental factor. The American investor public, as we see it, remains under advised, under-invested. When they are invested, they’re not diversified properly. There’s such an acute need for people to engage with quality financial advisors.

The industry has evolved but the industry is facing challenges. There’s a lot going on right now in wealth management. Frankly, financial service is at large.

Patti: What kind of challenges?

Sterling: Many would argue that this is a late-stage cycle in the investment of capital markets. The fact is that businesses has grown over the last course of last 12 years with double-digit equity market tailwinds.

In fact, that period from 2008 to 2018, on average, the US equity markets returned about 14.4 percent. Looking forward for the decade to come, the people that we’re talking to are suggesting best-case scenarios in the five to seven percent range.

Who knows if that’s going to happen? You can read Barron’s magazine to see very conflicting opinions on what the capital market forecast is going to look like. We believe that it will be characterized by greater volatility, lower returns across asset classes, and an unpredictable interest rate environment.

That’s going to make it harder for investors to earn the kind of returns that will fuel these better outcomes. It also make it harder, frankly, with greater volatility, for advisors to shift to that behavioral coaching methodology, to make sure that clients are making the smartest decisions across the breadth of their financial lives.

Some are going to thrive in that environment because they’re very capable, they’ve been looking forward to that opportunity to provide deeper, more meaningful advice to clients.

Others whose business is predicated on more of a transactional or brokerage type model that are simply providing access to capital markets, we think are going to struggle in that paradigm.

Patti: Because if you’re just being measured on performance, and performance isn’t there for anybody, then the client might say, “Well, what have you done for me lately?” “What’s happening here?”

To your point, it comes down to the outcomes, especially when so many Americans are not tracking well to retirement. They go from that accumulation to decumulation, which makes that future environment even more challenging.

Sterling: The greatest wealth holders of this country, the baby boomer generation, that’s the Americans that were born between 1946 and 1964, while they’re less than 25 percent of the American public, they hold more than 80 percent of consumer personal finance assets.

That group is turning 65 at a rate of 10,000 people every day. As they make that transition from the accumulation to the distribution phase, as you referenced, we think their need set is going to fundamentally change.

What they value and are willing to pay for from financial institutions and financial advisors for the decade that’s past will be very different, we believe, than the decade that is to follow.

Patti: Some of the fundamentals, such as sequence of return risk, when you’re taking money out of a portfolio. I think a lot of clients don’t really understand how risky that really is. There’s a mantra that they should be more conservative.

What does that really mean, this need for all of us to really educate our clients through that transition and process is going to be greater than ever.

Sterling: Absolutely. The best and strongest portfolios will be anchored in fundamental comprehensive financial planning. The advisor’s ability to root out what that need set is what are the conditions of this family? Look at the estate as a total financial entity, and then build a portfolio around that. They will be the ones who we think will really shine in this environment looking forward.

Patti: What have you noticed, if anything – is there a difference between men and women – in terms of how they approach financial advice, financial planning? What are your thoughts on that?

Sterling: Well, it’s something that we’ve studied very carefully and we have very strong conviction around the role of female wealth holders moving forward. It’s estimated by 2023, that two thirds of all global wealth will be controlled by women.

If you look at the baby boomer generation as a whole, that I was referencing, on average, females are outliving their male spouse in the baby boomer generation by 10 years. We think they might seek to do business with people whom they identify with.

They might want to have a different kind of insight than their male spouse into the way the money’s being managed. That could manifest in a myriad of different ways looking forward, but we think there’s a huge opportunity for female financial advisors.

Now, historically, females have only been about 16 percent of the business. That hasn’t changed for as long as I’ve been at Barron’s.

Patti: I find it interesting because I found that going to conferences, when I first started over 30 years ago, the numbers were even more dire as it relates to women versus men. It’s such a wonderful industry for a woman.

We can pretty much make our own hours, really develop deep relationships and really help people. It’s a great industry.

I think that there’s this perception of it that isn’t necessarily true.

Sterling: Yeah, I would agree with that if I think about the wealth management industry. There’s a lot reasons why it’s not attracting as many young people, particularly female young people, as it should.

I think there may be a misperception that it’s a sales business. There may be a misperception that somehow the financial services industry is corrupt among the millennial generation.

Neither of those are true. Or, it could frankly be the fact that the bulk of American’s have almost zero exposure at the high school level to financial proficiency and financial literacy.

Patti: It’s wonderful because I think that you guys have launched this Barron’s in Education. I think that’s a wonderful initiative. I’m going to get involved in it. Why don’t you talk a little bit about that?

Sterling: Sure. The Barron’s in Education program is about 18 months old, and it was a program that was born on the idea that we need to do something to increase financial proficiency at the university and college level. The idea is that we would give a financial advisor or financial entity the opportunity to, in fact, sponsor access to Barron’s digitally for an entire college, university, or business school student body.

Over those 18 months, we now have 66 colleges that are enrolled. We have over 100,000 US students that are going to get access to Barron’s. Just that engagement, that access, we think will foster curiosity, people want to learn more and better understand capital markets.

We’re planting a seed that we understand it’s going to take a long time to grow, but we have to do something to increase financial literacy in this country.

Patti: I think it’s amazing program in terms of what you’re doing for each of the universities and colleges.

I know that every week, you guys are sending out bullet points for professors to use in their lesson plans, assignments to give to the students, with really good, deep analytical content so that they can plug and play and really introduce these concepts not just to the business majors, which I think initially was who you thought it would go out to.

But we’re looking at providing this for medical students or kids who are studying communications, because there’s some basic fundamentals that if these kids understand them, they graduate, they can begin to apply them and they can really make a difference in their long term outcomes.

Sterling: Sure. Simply the power of compounded interest, the idea of fostering investments over time. If you stay invested and diversified over a long period of time, it’s almost hard to not have a positive outcome.

Patti: No question.

Sterling: For us, the idea at the base level, maybe if it was simply creating a more educated investor base. That has great value in it. We’re hoping people will be inspired to maybe work in financial services or perhaps wealth management, but just exposure to that financial proficiency and an increase of awareness and interest in having better financial outcomes is a really important endeavor.

Patti: You have gone global, haven’t you? We had the wonderful opportunity to go to London for the Barron’s Global Summit and looking forward to Australia. Tell me more about those initiatives.

Sterling: You did a great job for us over in London, Patti. The Brits loved you, what can I say.

For our own business, we want to expand globally and what we’ve thought is, where can we replicate this formula of thoroughly investigating the wealth management business in a non US market, journalistically creating a ranking of top advisors in that market, and then disseminating practice management content from that ranking that we’ve learned.

We’ve been active now in Australia for four years. It’s a very structurally similar market, although they recently had a rather cathartic regulatory overhaul of the business there that’s really fundamentally changed the structures underlying the financial services industry. But from an advisor to client level, it’s pretty similar.

We’re very active in the United Kingdom, where you referenced the event where you spoke in July. It’s a heavily fragmented market there, but the same paradigm exists. The average United Kingdom individual is under advised and under invested.

Patti: I found that interesting. They’re really under invested, aren’t they?

Sterling: Yeah, it’s a culture of savers, but they need to get more invested in capital markets, the industry. There are great people over there doing incredible work, and the word’s getting out, but it’s been a period of political distraction in the United Kingdom of late as well. We’re starting an initiative in Canada and Switzerland as well.

Patti: That is terrific. Think about the impact that you have on a global basis and what it could mean for individuals and families. This is a big deal. As we look at the gap between the people who have and the people who have not and the pressure that it puts on governments to provide social programs to help them, something does need to be done.

As you said, it comes down to basic good advice and someone that you can talk to, to be accountable to, to check in with. You’ve heard the saying, “You get what you measure and what you measure gets done.” To have that process of measuring, progress.

Sterling: Thank you. We’re trying and we’re constantly trying to evolve our methodology, we’re constantly trying to make the ranking better. There’s a deep journalistic process that goes behind that.

From our view, when it comes out, we are creating that journalistic ranking, but it’s less about 1 100, it’s more about our message to our readers, and by effect, the American investing public.

You might not think there are good people out there. There are lots of them, here’s an example of 100.

Patti: It does, it gives people hope and an understanding that there are excellent people out there providing amazing advice and making a huge difference to families all across America.

Sterling: Absolutely. We say you shouldn’t go it alone, try and get some advice, try and get people that understand your needs, understand where you’re going, get counsel, and you’ll make better decisions based on that. There’s such a breadth of different ways that you can access good advice now, be it a full-service planning based advisor, great firm like yours, or digitally if you can’t afford that.

There’s lots of different ways to find advice right now.

Patti: I often tell people when we’re talking about things and we’re going through really rough times, I say. “Probably one of the most important things I do for clients is to save them from themselves.” To help them to understand what’s happening, that it’s not going to be permanent, we go through cycles, and they’re going to be fine.

Just stick with the things that we’ve agreed on that need to occur on an ongoing basis. I think that that’s so valuable. You’ve also taken this initiative of this hall of fame. What’s the hall of fame about?

Sterling: There’s a lot of things going on in the wealth management industry. We’ve been ranking advisors going on 16 years now in the pages of Barron’s Magazine. We do a state by state list, we do top women advisors, top advisors, top independent advisors.

One of the things that we’ve noticed is this notion, among the very best firms, of succession planning, and the importance of succession planning and plotting a future for the firm.

It’s not just about the continuity of the business beyond the principal and founder, but it’s really about making sure the clients are taken care of over the breadth and long term future of the business. Many advisors who are in that ranking are starting to implement succession plans.

Some are, some aren’t, but they’re starting to say, “What’s this going to look like, structurally, across my business? Am I going to give equity share of ownership in my business to others? I’m going to foster that succession plan.”

Some of those advisors inevitably are going to step away from that business. We wanted to create a mechanism that identifies advisors who have been consistently ranked in Barron’s Top 100 Advisor List for a decade or more.

Patti: Not an easy feat.

Sterling: It is an intensely competitive list. Those people who have achieved that hall of fame status, like you have, – and congratulations on that – …

Patti: Thank you.

Sterling: …we’re recognizing them as Hall of Fame members. I know in your business there’s no big changes planned in the future, but there are others out there whose businesses are going to go through a transition of sorts, and we wanted to create this mechanism around a permanence of recognizing those who are in truly elite status within the industry.

Patti: It’s also important that we all recognize that the most important thing that we do for our clients is not necessarily create this dependence on me, the advisor, but to help them to understand that we’re going to be here for the rest of their lives, one way or the other.

Sterling: Multi generationally, in fact.

Patti: Ideally, absolutely. We get to know the kids. It’s an incredible…What a wonderful, rewarding business this is. We get to develop relationships and become real friends.

Again, sometimes we have to give the tough advice, but it’s advice that we believe is always in their best interest. For them to know that they can rely on us, not matter what happens in their lives, what a privilege that is.

What an opportunity it is for young people to recognize that this is out there, and that they can do not only well for themselves, well for their families, apply this information so that they get to be like Ed and I that just made our last tuition payment, but also have incredible impact on other people. Long ago, this has never been about the money for me, it really hasn’t.

It’s really fun. I love this. We have a blast. To be able to hug our clients and to have them come in…Sterling, I will tell you this story. We’ve had several meetings over the last…lots of meetings with clients. We’re doing a lot of year end tax planning.

I had a woman in my office yesterday, a widow, who basically went into tears. She looked at her statement. We talked about the idea for some tax planning for her, identified how much money it would save her. She looked at me and she said, “What would I have done without you?” Does it get any better than that? It’s amazing.

Sterling: What’s interesting is that feeling that you just described that you had, of helping someone through an incredibly difficult period, and helping them realize the security that comes with financial wherewithal.

That’s emblematic of great advisors that we meet across the country in all different kinds of structures, whether they’re with big banks on the west coast or financial planners or independents, what have you. That desire to help people feel more secure and achieve true financial freedom is so empowering.

The way you speak to that’s very eloquent. It paints a great picture, but it’s very consistent among the very best people we see in the industry.

Patti: I’m going to tell you another story. It’s something that happened about a month ago. I have a dear client who’s been a client for 25 years. She had a stroke. She’s in one of these continuing care communities. She had a stroke. She couldn’t come in. We needed to meet with her, so Stacy and I drove out there, and we sat down with her.

Long story short, one thing led to another, and she told me about something that has happened with a mattress. She was, frankly, being completely exploited. She bought it from a department store, took the first one back because it was too soft, then the second one was too hard, then had the stroke, so she needed to lower…

Long story short, the third mattress was $15,000, and it didn’t work. It was supposed to go up and down. It didn’t work, but they wouldn’t take it back. I was so mad. I was so angry. I literally said, “Susan, get me the name of the person you were dealing with. Get me the name of the manager.”

It happened to be right here locally in King of Prussia Mall. I marched myself out there and, long story short, she got a credit back on her account. It’s those little things. She was like, “I can’t even believe that you took the time to do that.” I was so mad about it, and I literally shamed them into doing that.

Those are the things a lot of people say, in fact, there’s a lot of things that people say, “I didn’t realize that a financial advisor does that.”

Sterling: The best financial advisors…You have to be a good investor, you have to be a good planner, you have to be thoughtful, but you have to be a protector too. That’s something that is very consistent among those people we think highly of.

Patti: Well said. Well said. You have to advocate in all areas. Well, Sterling, this has been terrific. Thank you so much for your time. Thank you so much for making the trip.

All I can say to you is, you are the visionary that we’ve all been looking for. Your ability to see the trends and to elevate the entire industry and to let Americans know that there are people out there that can make a big difference all over the country in all business models.

Sterling: Thank you for having me, Patti. I appreciate it.

Patti: For all of you, thank you so much for joining us today. It’s been a wonderful, wonderful talk about something that is different, but important in all of your lives.

If you have any questions, please go to our website at keyfinancialinc.com. Give us a call. Send us ideas of anything else that you’d like to learn about.

In the meantime, I hope you have a wonderful day, a wonderful year as we end this decade and go into an incredible future for all of us. Until next time, I’m Patti Brennan. We’ll see you in the next episode.

Ep33: Retirement Through the Lens of The Longevity Economy

About This Episode

In the last of a three-part series, Patti concludes her discussion with MIT AgeLab Director, Dr. Joseph Coughlin, PhD. As the author of The Longevity Economy, he describes in detail how the last 8000 days of a person’s life can be designed to be lived at it’s absolute best, through a myriad of “longevity resources” that are available. Listen now to find out how to collaborate with trusted professionals to curate the retirement you want for yourself and those you care for.


Patti Brennan: Hi, everybody. Welcome back to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me again is Dr. Joe Coughlin from the MIT AgeLab. Joe, welcome back to the show.

Dr. Coughlin: It’s great to be here. Thank you.

Patti Brennan: This is so much fun talking to you about your research and what you’re doing up at MIT. Can you tell our listeners a little bit more about the lab and how you approach things up at MIT?

Dr. Coughlin: The AgeLab looks at the entire lifetime of to 100 years of quality life in a variety of areas transportation, caregiving, the future of the house and indeed longevity planning.

What makes it fun, is not we got a lot of fun people, but they come from different disciplines because aging is truly a multidisciplinary sport. We, yes, have engineers. We have to. We’re MIT. We also have sociologists, social workers and like, as well as almost every flavor of psychology you can imagine. We’re trying to invent the future by looking through the eyes, if you will, of a consumer.

Patti Brennan: It’s great work, and the research that you’ve been doing is important. It’ll help to understand the trends of what’s happening in America today. Let’s talk a bit about the most recent research that you’ve launched on caregiving.

Dr. Coughlin: We’re excited about something we call Care Hive. If you ever think of a busy bee in a hive. We’re caregivers, and most of us don’t even know we’re caregivers because sometimes it’s calling dad to say hi. Some of it is certainly extreme with taking care of every aspect of our lives.

We are recruiting nationwide and love to ask your listeners to join if they want to go to our website agelab.mit.edu to sign up to be a caregiver online where once a quarter, every three months, we’d love to send a survey or maybe an experiment or ask your opinion on something, so that we can get into the micro moments if you will of, “What are you doing? How are you doing it?”

What we want to do is to take this anonymous information to power new ideas of my students and researchers can do with new technologies, new services, and also get companies to know that their employees are also caregivers. That their customers are often looking for solutions to take care of mom, dad, or a spouse.

We’re excited about this because we hope to not just have people living longer, we hope to have them living better.

Patti Brennan: It’s also important for people to understand who is a caregiver. It’s a spectrum. It tends to evolve over time starting with that phone call. What happens next? What do you find then?

Dr. Coughlin: I think about it is a level of effort that only grows over time so, you’re right. It absolutely starts with that first phone call, simply just being a good kid, and saying, “Hi,” but then it starts to pile up. It’s like, “Well, the appliances need fixing” or “Need to go grocery shopping.”

How many of us have been the advocate to take our mom or dad to the doctor’s office, to be in the room to make sure that the mom and dad tells the entire story of how they’re really feeling versus what they may want to tell. It ramps up and we want to map that out, understand that true caregiver journey overall.

Patti Brennan: You talked about another study. It was a smaller study that you did for CBS with 800 participants?

Dr. Coughlin: No, it was only 30 but over eight months.

Patti Brennan: That’s well.

Dr. Coughlin: I was really concerned. There’s a fine line between research and basically bothering people. We were asking these folks to check in with us on almost a daily basis. These folks were working. Their loved ones were in varying intensities of care need.

What came back was amazing because I was almost worried about not doing the study because I thought this would be too much for the people. They came back and as caregivers, they said, “No, we want to do this and we really loved participating because no one asks about us.”

If you think about it, the cost of caring, if you will – to be financial with you for a moment Patti – the average family spends anywhere from $300 to $500 per month on everything from mobility, to groceries, things like that and that’s when it’s low level caregiving. There’s another cost to caregiving, particularly for women who are the primary caregivers.

They often put their careers on hold. They are behind in their retirement savings. Also, there’s the physical and emotional. Often, it’s complete fatigue, back pain, and depression. The idea that we were asking them how they’re doing, how they do their daily job, actually made them feel better that they could share it with other caregivers.

Frankly, it’s always good to know that you’re not the only one doing something that you think is simply just being a good family member when, in fact, it’s a very common thing.

Patti Brennan: Let’s share again your website so that people can do that and for those of you who are driving, don’t worry. Don’t pull over. We’ll have all of this information in the show notes. Go to the website and get the show notes and you’ll be all set.

Dr. Coughlin: The MIT AgeLab’s website is agelab.mit.edu.

Patti Brennan: You mentioned the idea of being able to recognize that you’re not alone in this and that you can do some brainstorming and learn from other people who are going through exactly the same thing. One of the things that we’ve talked about, you and I have talked about offline, are some of the things that we’re trying to do to introduce people to services and information.

Places where they can get information that they may not be aware of. You talked about the different levels of service that advisors can provide. Why don’t you share your thoughts on that?

Dr. Coughlin: I’d like to think about advisors being at least in three different buckets if you will. The first one is the more transactional that is needing to save for retirement. I want to buy this, I want to save for that. Very basic, very quantitative only.

Then there’s the planning advisor, which does the transaction work but also has a long term plan with goals that are addressed by the client and with the advisor. Where I think the future is, where all of us ultimately need, is the longevity advisor.

The longevity advisor does more than taking your goals and making them real on a plan, ensuring the financial security. That’s absolutely needed and expected, but the longevity advisor anticipates what that future is going to be.

Remember, here she has many clients and has seen old age through the lens of many different people and different experiences in many cases with different resources. I don’t mean just money resources, but coping resources, physical resources, cognitive resources to be able to provide care or whatever it might be.

What a real good longevity advisor can do is to help you curate. What are the various retirements you might envision at different parts of your older adult life?

How can I connect you with all the services that you may need to age well or to provide care? Then, how can they collaborate with you to change retirement as you move through those last 8,000 days of life.

Patti Brennan: Again, talking about what we discussed before even redefining what that looks like. The opportunities that can be created, whether it be going back to school, starting a new business that you’ve always wanted to get into. It’s not necessarily just being with your grandchildren on the sideline at the soccer game, right?

Dr. Coughlin: Those games are pretty short to begin with and are often cold out there.

Patti Brennan: Then the kids run off, they don’t want anything to do with you.

Dr. Coughlin: Exactly. They become teenagers, not as cute. Patti, you and I have talked off one and you’re one of the labs shall we say ideal case studies as to how it should be done. Other advisors as well are starting to realize that there is a vast white space and need for clients out there to be able to anticipate things in the future.

We can read books and watch movies about so and so starting a new company or the occasional story in the newspaper or, “Gee, look at this 75 year old lady who just got a masters in,” fill in the blank. It’s different when it comes from your advisor because she’s dealing with other people like me. That means I can identify, it’s possible.

It’s no longer a human interest story on Channel 6.

Patti Brennan: To your point, it’s possible for me. It’s one thing if it’s in a book or something like that, but how do you go about doing this? You don’t have to have a 50 page business plan. Let’s take one step at a time. What’s possible? What’s that look like? Let’s have some fun with it.

Dr. Coughlin: Yeah, absolutely.

Patti Brennan: Speaking of having fun with it, one of the things that I think is important and for all of you who are listening this will also be in the show notes. Let’s talk about some of the services and the things that are out there today that people can take advantage of. Either for themselves, or for the people that they love.

Let’s talk about education, since we’ve just talked about that. You’ve mentioned going to Georgia Tech, right?

Dr. Coughlin: Yeah.

Patti Brennan: Getting an education and a Master’s degree for $8,000 online. There’s other online opportunities for adult education as well. There is OLLI, right? Let’s talk a little bit about that.

Dr. Coughlin: There’s OLLI. That is both online opportunities on a variety of things. Everything from shall we say the art history course that your parents did not want to pay for, to maybe something that requires you to change careers overall. I’d be greatly remiss if I don’t talk about the home team.

MIT along with other universities created edX. You can take a class, for instance one of my own classes that’s up online, or anything from supply chain management to engineering to yes English. Whatever it might be to shall we say improve your edification of what you want to learn about?

Also to change careers or to frankly have something new to talk about when people say, “What do you do?” Instead of just saying, “Well, I’m retired and kind of dot, dot, dot,” after that, go, “Yeah, I’m retired, but I just took this class and I’m doing X.”

Frankly, it’s just good conversation to keep you alive and vital and connected. Other options don’t have to be so grand. They can be local. Many community colleges, and probably one of the greatest resources everybody has access to, is a state university system.

Many of these schools have amazing adult education programs, but frankly the average age of a student in the classroom is climbing up so don’t be shy to jump into a classroom with a bunch of 21 year olds because frankly many of the faculty will enjoy it. Secondly, you may see many of your peers sitting near you.

Patti Brennan: I have a wonderful client who takes courses here locally at Villanova, and he is the old guy in the back of the room who’s auditing this class. It’s so much fun to talk with him because he tells us the stories of the things that he’s learning about and how he’s really showing these kids up.

Dr. Coughlin: Absolutely.

Patti Brennan: The professors love him. He’s engaging. He’s introducing that crystallized intelligence that you talked about earlier and really learning a lot along the way as well on random subjects that he never…He was a pharmaceutical executive. He’s taken everything from religion to random topics that…

Dr. Coughlin: That’s a great example where we should really redefine retirement, not as a time to pull back and rest, but a time to explore. The longevity economy is not just about the money out there, and what businesses are out there, but this is an entirely new frontier to invent what that third of life is going to be.

Patti Brennan: Wouldn’t it be cool if somebody were to invent a business that literally was just about longevity and introducing people to many of these experiences that we’re talking about today, whether it be education or car stuff, or whatever it might be that people might be interested in learning more about. How to fix a car. I don’t know how to change oil. I’d love to learn, maybe. Maybe not.

Dr. Coughlin: I think these days you need a computer science degree to change a car.

Patti Brennan: That is true, too. OK, that’s out for me. One of the things that we talked about earlier. Grandchildren are the apple of a lot of people’s eyes.

One of the things that I’ve done in the past is introduce grandparents to someone that I know who’s got a business called Eat to Compete, which is a really neat way of teaching these kids about healthy eating, but also how food is really fuel and how it can improve their performance. Things of that nature that they otherwise wouldn’t know about.

Dr. Coughlin: I think it becomes even more important as we age because we fall into bad habits. Patti, as you know, I’m originally from the Delaware Valley so I still believe that Tasty Kate cheese steaks and Scrapple are food groups so over time…

Patti Brennan: Oh, we have a surprise for you…

Dr. Coughlin: [laughs]

Patti Brennan: …Dr. Joe, for lunch let me tell you.

Dr. Coughlin: Only my cardiologist knows for sure. We’ve fallen to bad habits or convenience habits, if you will overall. Having that experience with your grandchildren, peer pressure from a little 8 or 9 year old is a lot more powerful than an M.D. telling you can’t do it anymore.

As we age, micronutrient deficiency, which is shall we say geek speak for the fact that you need to eat the blueberries because your system is not absorbing as much as it used to. You actually need to eat more of the good stuff than you ever did before. That women, particularly older women, are 90 percent more likely to be wandering around dehydrated.

Yeah, it’s not just about making a connection with grandchildren, but it’s about getting your game on as well as theirs.

Patti Brennan: That is great information. The other thing is we talk about medicine. We talk about healthcare, but there’s also a whole new world of alternative healthcare out there. When one thing is it working maybe acupuncture will help.

Dr. Coughlin: Acupuncture, herbal teas. It’s interesting. The literature out there is somewhat foggy because it’s looking through the lens of traditional western medicine, but be aware, as you know Patti from your own medical background, is at the National Institutes of Health do have a complementary medicine division. This is now becoming more and more mainstreamed.

Patti Brennan: CBT is here to stay.

Yeah. It’s important. To talk about something that’s a difficult topic, again to help listeners out there, is a lot of our clients are being exposed to the opioid addiction.

Dr. Coughlin: Yes.

Patti Brennan: It comes up in conversations as we’re talking about estate planning. If you’re leaving money to children or grandchildren, you don’t necessarily want to leave a lot of money and support that addiction. We’re really beginning to introduce those people to incredible family counselors who specialize in addiction.

What are the good rehabs and what are the ones that you want to stay away from? A lot of times, people are talking about zip code therapy, which is very effective. People, places and things, get them out of the area. Well, OK. That’s fine and dandy, but I don’t know any places in California or Florida. I’ve heard horror stories about some of them.

To be able to connect families in a really difficult chaotic period of their lives, and to be able to give them hope that there is a solution, here are the people that you can call to help.

Dr. Coughlin: We’re often doing it in a state of panic, which is not the time to make a good analytical determination. That’s what I mean by a longevity planner or longevity planning. Having that resource of saying we’ve seen this before, we’re not saying this is the absolute answer, but here’s the range of possibilities and the questions to ask.

Patti Brennan: The other thing and I think you’re teaching a course right now on universal design.

Dr. Coughlin: I have a new course actually, on designing for an aging world. I’m really excited about it because it’s going to be looking at housing and transportation. Frankly, all the physical built environment that we take for granted as we age.

Patti Brennan: I’m so excited to have you here today because folks, those of you are listening, I want you to know that Dr. Joe is going to take a walk around my office and give us feedback because we are in the midst of a renovation. How are we doing there? How inviting is this? Does it work for our clients?

That’s really important because I do want to make sure that it’s a comfortable environment where people feel really safe.

Dr. Coughlin: Yeah, absolutely. If you think about the stores that we shop in or the stores that we like or the hotels and resorts we like to go to, it’s not just about the service. It’s certainly not just about the product. They always remember how you made them feel.

Patti Brennan: Yeah. Oh, absolutely. Absolutely. In addition to those things, let’s talk a little bit about exercise. A lot of people think they have to go out to a gym and work out and kill themselves. It’s true, though, isn’t it? That there are actually trainers who specialize in cardio for 70 year olds.

Dr. Coughlin: Right.

Patti Brennan: Right. Because it’s different than our kids or younger people. How do you do that safely to connect people to those trainers who specialize that? If you’re a trainer you might want to think about really creating a niche for yourself out there because there is a growing need for that. We talked about Alzheimer’s and your theory and mine as well.

There’s a gentleman named Deepak Chopra who talks about the 15 biomarkers of aging. Biomarkers are gray hair, wrinkled skin, things of that nature. He talked about the 10 things that we can all do to improve the biomarkers and increase our life expectancy.

Dr. Coughlin: It’s amazing how much behavior is its own medicine.

Patti Brennan: Isn’t it true?

Dr. Coughlin: Yeah.

Patti Brennan: It is fascinating. Some of the things were really interesting. For example, wouldn’t surprise anybody here. Avoid toxic substances and toxic people.

Dr. Coughlin: [laughs]

Patti Brennan: How’s that? Increase your life expectancy.

If it’s not working, remove that from your life. You already know this, I think, but if I were to ask you what is the one thing that people can do that actually improves all 15 biomarkers? What would that be?

Dr. Coughlin: I’m going to guess it’s exercise.

Patti Brennan: You got it.

Dr. Coughlin: The new prescription.

Patti Brennan: It is the new prescription. To make people aware of that, the people that you’re introduced, the people who are listening, getting out there and walking.

It doesn’t have to be crazy sweating, the whole thing, but that interval training, walk fast, walk slow, really does a lot to improve your…

Dr. Coughlin: It’s the street sense – use it or lose it. Our parents knew that. If you think about it, even those who used to do a lot of manual labor. It was amazing how those folks who worked hard with their bodies lasted a long time.

Patti Brennan: Your point earlier offline is that a lot of people think that that’s the lack of…The couch potato is contributing to Alzheimer’s in America.

Dr. Coughlin: Yes, exactly, because if you think about it, a lot of the diseases, whether it’s behavioral related diabetes or cardiovascular, have many of the same indicators of what we think is proverbial senior moment or Alzheimer’s.

In fact, it may be stroke. It may be various other issues around CVD.

Patti Brennan: When you think about the quality of life in that last third of life, even if you do, you go to a gym. Well, who else is at the gym, right? You can take these classes. You’re around other people.

My best friend in the whole wide world is a Chester County housewife and very proud of it. She spends probably four hours a day at the local gym. All of her buddies are there. They workout. They go to lunch. That’s her social life.

Dr. Coughlin: Social connection. If you can put the physical fitness and social connection together, that is probably the two best choice a book ends of retirement one can imagine.

It’s not just about going to the gym, but maybe even a gym that caters to people that you have an affinity with. There’s something called Silver Sneakers which is the largest program for those over age 50 nationwide.

There are countless other gyms that are doing that. Not just to get exercise but get out.

Patti Brennan: It’s so important. Just get out.

Get out of the house. Engage with other people. Improve the quality of your life.

I think that also, when you think about this whole process, is to your earlier point, to anticipate what people might be going through, and introduce these concepts ahead of time.

Again, for those of you who are advisors, I hope there’s a lot of advisors listening.

Really bring these topics up to your clients so that they begin to think of you as that go to person for not just, “I need $5,000” but, “I’ve got this going on in my life. Can you help me?”

Dr. Coughlin: Yeah, we need to expand beyond the concern that, “Is my wealth span going to be as long as my life span?” We want to make sure that that lifespan is not just about living longer, but by living better.

Patti Brennan: One of the things you also mentioned was this group called Meetup. Tell everybody what that’s all about.

Dr. Coughlin: Meetup is, they join online, and then join offline. Do things that they’re interested in, which could be something, shall we say, like wine, or it could be on computers, or music, or something like that.

Basically, groups together that meet based upon common interests. You’d be surprised, some of them may be 30 year olds, some of them maybe 80 year olds.

The idea is that interest is ageless.

Patti Brennan: It sure is. It creates instant rapport.

I am reminded of a client I met with couple weeks ago. Loves to travel. She loves to travel.

Her husband is now deceased. She has nobody to go with. She’s really bummed out.

She’s trying to get her grandchildren, get somebody to go on these wonderful trips, that are amazing, but there’s nobody that wants to go with her.

That’s the idea. That’s when I brought up Meetup to her, that there are other people who would also love to go to Croatia with you.

You just don’t know where they are. Why don’t you go online? Go on Meetup, and see if anybody else…

Dr. Coughlin: Put your investment hat on for a moment, Patti. One of the greatest tragedies in investment community today, that we have so few industries, let alone business brands out there, that are brave enough to invest in the 50 plus longevity economy.

Think about this. Only two percent of dollars that go into advertising go to the 50 plus.

Yet the 50 plus controls 70 percent of the discretionary spend. It’s not just about your friend looking for a colleague to go.

She’s got money. She’s got time.

She is a market, and so few businesses are recognizing that.

Patti Brennan: Absolutely. I think that also when you think about that person in terms of what that last third of life looks like, to really introduce these ideas, and to make sure that they’re aware of them.

What else should we be talking to our listeners about in terms of ideas? I think about continuing care communities, for example.

One of the things that we’re doing is creating a grid of all of the communities in our area. Not just about the cost, the lump sum, the monthly fees, and the different deals that they have. Do they cover all three levels of care?

But also the culture. Do they allow wheelchairs in the dining room? Are people who may not be as healthy are they mainstreamed with everybody else? Can they be with their buddies, or are they going to a different dining room which definitely exists out there?

That I think is also important in terms of thinking about those housing decisions and where you’re going to spend that…

Dr. Coughlin: Especially if you’re planning as a couple. Are you in a continuing care retirement community that has that continuum of care from independent living where you maybe still be driving and you come and go as you please, to assisted living, to skilled nursing, to even memory care?

The little questions you want to ask like the ones you mentioned. Another one that we see more and more often is, will I be able to stay with my spouse or if I can’t stay with my spouse, can we at least visit?

Can we have either, for instance, there is now a new design being used in senior housing where it’s one apartment, but two different bedrooms with one very small common area.

That way the medical issues, cognitive issues can play out, but you can still be together while living apart.

Patti Brennan: It’s also really important for those people who are single because a lot of people do go into these communities, and they are a single.

A client recently had a stroke, and she’s in the medical wing of this community, and she’s really lonely. She misses her buddies. She is in a wheelchair. She can’t walk, but cognitively, she’s fine. She’s just bored to tears.

Unfortunately, she can’t get to the other wing. I told her about this new wheelchair called the Zinger. Have you heard about this?

Dr. Coughlin: I have not seen this one.

Patti Brennan: I want to get one of these things.

Dr. Coughlin: It’s a great name, too. [laughs]

Patti Brennan: Yeah, it is the coolest thing in the world. First of all, it’s really light. It’s foldable, and it’s got power so that she can steer it. She can do circles, etc. She can go up to eight miles an hour.

Dr. Coughlin: Wow.

Patti Brennan: Be careful. Don’t want to be in the hallway with this woman.

Dr. Coughlin: Popping wheelies.

Patti Brennan: Exactly. It gives her that mobility to be able to get into the zinger, and go to the other wing and have lunch with her friends. She doesn’t have that. She has to wait for somebody, wait for the wheelchair etc. Little things like that can make a big difference.

Dr. Coughlin: I think one of things that your listeners may find of interest as well is that often when you do go into care like that or rehabilitation, it’s at the point of emergency and urgency.

If you do have the time to do part of your own longevity planning, which is to identify those places that you may need, interviewing the executive director of each of the properties to find out what is the culture of this place? Are they helping you move from unit to unit? Are they increasing intensity and density and accessibility of people to create community?

Really not just about the space, not just about the care they have on the list, but who’s the management.

Patti Brennan: Also to really understand that it can be a lot of fun going to these places. It’s not the place that you’re going to die.

Dr. Coughlin: Many of them now have pubs even.

Patti Brennan: It’s a blast. They have parties. They’ve got the wine. It’s incredible. People are having fun. They’re meeting new people. They’re engaged, and the studies, as you probably know, is that people who go into these communities, assuming that it’s a good one and supporting them, they live much longer than people who do not.

Dr. Coughlin: The average age now is getting older going in because so many of us want to age in place, but we’re finding because you were mentioning that so many of us are living alone, going to have that community is more important than where you’re living.

Patti Brennan: Yes, exactly. Especially as you’ve said before, families are so fragmented all over the country. To be able to go to a community and have a whole new tribe. We all want to belong. We want to have friends. We want to have a tribe. It’s terrific because they provide the transportation. You can go to plays. You’re still driving. You’re still going to your church.

You’re doing all of those things. It’s a new season of this thing called retirement.

Dr. Coughlin: In fact, some of the questions that people may want to ask as they shop not just for their parents, but pivot it to think about their own. Many of these properties are no longer just out in the hinterlands where land was cheap and they built. Some of them are now more and more urban. Think about what’s not just inside the wall, but what’s outside the wall as well.

Patti Brennan: Dr. Joe Coughlin, what can I say? Thank you so much. This has been so interesting. I’ve thoroughly enjoyed all three of these podcasts. I would love to have you here all day, but I don’t think MIT would allow that.

Dr. Coughlin: The day job calls. [laughs]

Patti Brennan: Yes, absolutely, and the research that you’re doing also calls. Again everybody, go to the show notes. Log on to MIT’s site. If you are doing anything, remember, it doesn’t have to be changing diapers. If you’re making phone calls, that’s the beginning of that spectrum of care giving.

We want to hear from you. We want to learn what your life is like.

Dr. Coughlin: Share with others.

Patti Brennan: Share with others. Give MIT the data so that they can determine, “Gee, what are the services? What are the products? What are the things that can make a difference not only for you as a care giver, but the person that you’re providing that care for?”

Dr. Coughlin: Patti, I have the unique fortune to be a researcher, which I means I get paid to watch. It’s a delight to be with you, a true innovator in the practice. Thank you so much for having me.

Patti Brennan: Thank you, Joe. Thank you and thank you all. All of you who are listening today and who’ve been listening to these podcasts over the last few months.

I’m so honored that you spend that time with us. I can’t believe how viral this is becoming. I can’t stand listening to myself, but that’s beside the point. Thank you so much. We couldn’t do this without you.

If you have any questions, go to our website. It’s keyfinancialinc.com. Feel free to ask us any questions. We are here to help.

Feel free to share this with your advisor because again, Dr. Coughlin and I and many of us, we’re here to raise the bar of the industry, to let people know the kinds of services that people want and need.

We can anticipate those needs and make a difference in people’s lives. Thank you again for joining us. I hope you have a great day.

Ep32: The Retirement Myth – It’s Not One and Done!

About This Episode

In the second of a three-part series, Patti continues her discussion with MIT AgeLab Director, Dr. Joseph Coughlin, PhD. The face of retirement is rapidly changing due to people living much longer than ever before. It is no longer unusual for people to be living 30 years after their official retirement date, so how are people filling their last 8000 days? Most are starting 2nd or 3rd careers and will actually have multiple retirements! This is not the only startling realization…listen to learn what else will cause ripple effects in generations to come!


Patti Brennan: Hi, everybody. Welcome back to the “Patti Brenan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow and use your assets to live your very best lives.

Joining me again is Dr. Joe Coughlin. Dr. Coughlin is the director of the MIT AgeLab. For those of you who are just tuning in now, feel free to go back to the prior podcast, it was phenomenal.

We learned about this thing called retirement. Dr. Coughlin is trying to redefine this thing called aging, change the paradigm to make it something that is a problem to be solved, but something in opportunity to be created. Let’s redefine it because it is changing rapidly right before our very eyes.

Dr. Joe Coughlin: I think it’s the biggest opportunity, not just for us as individuals and families, but for society at large.

Patti: Yeah, absolutely. Thank you so much for joining me again.

Dr. Coughlin: Great to be here.

Patti: Yeah, it was really interesting, even talking about the differences between men and women, etc. I’ve been so honored to be able to go up to the lab and learn about the research that you’ve done, the data that you’ve gleaned over the many years.

Just out of curiosity – and this is a sidebar – I’m hitting you with a question you’re not expecting. What got you interested in this?

Dr. Coughlin: It’s interesting. I started my career off, believe it or not, as a defense contractor.

Then the Cold War ended, as you can tell my age. The Cold War ended, and the company I was working for was very good to me.

They said, “We’re going to have to transfer you over into transportation because that’s a growing book of business.” Well, believe it or not, over time, I became an expert on an issue that’s trapped somewhere between humor and horror. Older drivers.

Patti: No kidding? OK.

Dr. Coughlin: I was doing a project for the US Department of Transportation and the White House Office of Science and Technology Policy, on the mobility needs of an aging society.

Think about this. We’ve been talking for 75 years that the boomers are coming, the boomers are coming. Well, not only are we here, but we’re taking one foot out the door and one on a banana peel, already.

No one had thought about the transportation needs. I was invited later by MIT to come, and teach, and research, and whatnot.

I wanted to start the AgeLab to be the first place, not just to look at transportation, but to look at life through the lens of a person, which is the integration of housing, transportation, care, finance, and all those things. That’s how I got here.

Patti: Wow, that’s so interesting. I was fascinated with Daisy, this souped up Volkswagen Beetle with sensors all over. I got to drive Daisy with this virtual reality.

Dr. Coughlin: Miss Daisy, as in “Driving Miss Daisy,” digitally, is essentially a several million-dollar video game. Not to test what is an older driver is, because frankly, birthdays do not predict almost anything. Health conditions, medications, diet, do, in terms of driving behavior.

What Miss Daisy allows us to do is things we don’t dare do on the street, such as driving distraction. How do all those new bells and whistles in your next generation car affect younger drivers and older drivers?

Ultimately, how do we learn to use, trust, and adopt new technology, is what Miss Daisy’s all about.

Patti: I thought it was so interesting that because of your work, you are able to understand that as we age, as we get older, our ability to move our heads is reduced by 40 percent, which is why so many older people get in rear-end car accidents.

Dr. Coughlin: I also get a kick out of the fact, and I’m one of them who’s always complaining, “You know these new designed cars? The ability to see out the rear window is terrible.”

Well, actually, it’s fine. You’re just not moving your neck or your trunk enough.

Patti: Wow. The insidious things that we don’t even realize are happening.

We also got to meet AGNES, and see the suit, and to put on the goggles. To realize what it’s like to maybe have cataracts and not realize it yet, and the impact that has on your vision.

Dr. Coughlin: AGNES, as you observe, is a suit that we designed at the lab. It stands for the name AGNES, an acronym, the Age Gain Now Empathy System.

It gives students, engineers, marketers, business at large, the, shall we say, the joys of having two or three chronic conditions like arthritis, Type 2 advanced diabetes, osteoporosis, or whatnot, a feeling that that age or age-related diseases.

In my book, “The Longevity Economy,” I write a pretty good section on how we used AGNES to create that “aha” moment for CVS, and other stores and product manufacturers to redesign the store experience, or to redesign the radios that go into cars, and things like that.

Although older people will tell you that there is a problem, a lot of them either lie or don’t want to admit that they’re having a little difficulty. An engineer who does it will go, “Oh my God. That’s stupid. We can fix it.”

Patti: It’s interesting. I learned from your book, also, people who are losing their hearing or beginning to lose their hearing, they’ll go 10 years without admitting it.

Dr. Coughlin: Yeah, it is sad that we often think of social isolation being about distance, but yes, the average person will wait 10 years before they even get a hearing aid, largely because they don’t like the stigma of what that is. That loss of hearing affects you over time cognitively but also takes you out of the party, so to speak.

I have to admit, there’s a little bit of, I should do what I preach, is that often, even when I’m in a crowd now, the ability to differentiate in a noisy environment makes it more difficult. If you’re not careful, you find yourself nodding and saying yes, and smiling…

…even though the person may be telling you something God awful.

Patti: Wow. I’ve been accused of doing that sometimes, too.

My kids will say, “Mom, you’re not even listening to me.”

Dr. Coughlin: We’re just getting them back from when they weren’t listening to us. That’s all.

Patti: This is true. That’s exactly true, too. Let’s talk about the trends that you’re seeing today in America, especially with our kids and in the millennials. Again, another statistic you brought out. 61 percent of American millennials under the age of 35 are without a partner. I see it in my own family.

To think about the implications of that going forward, where we all know they’re getting married later, and having fewer kids, but let’s think about that in terms of this later in life. That season of life if that trend continues, which most of us believe it will.

Dr. Coughlin: There’s certainly a ripple effect, not just for the millennials themselves, but on those who are older, that are depending shall we say, on that traditional life stage progression to buy cars, have kids, buy a house, buy my house, whatever it might be.

To your point, the millennials I’d like to call them in a loving way since I’ve got a couple at home and all in my lab, is generation delayed. In general, I would suggest that they’re 7 to 10 years delayed in doing what a lot of other people did at a similar time. You spoke about the data on them remaining single.

Yeah, imagine that. 18 to 35-year-olds, anywhere from 51 to 61 percent say they don’t have partner. Compared to that, 26 percent for those that were the same age in the early 1980s. They’re not buying cars. Well, that’s OK. You could argue that frankly, they’re using ride-hailing services, but they’re basically delaying when they get a driver’s license.

If they’re not having a partner, they’re not getting married, or whatever arrangement that they want, they’re also not having kids. In fact, the only group of women showing an increase in birth rate are women over 35 and women over age 40.

Patti: Wow.

Dr. Coughlin: With the ripple effect, there’s a couple things. One, it’s not the natural life stage that may make my home or things that I’m hoping to sell some day valuable.

We’re also looking at how the millennials are creating an entirely new lifestyle, whereby the time they may need care, they may not have a child at all or a partner or their child will be too young to be able to say to their boss, “You know something? I need to take a few hours off from work today. I’m simply going.”

You can do that when you’re 40 and older. 30 something, gets a little dicey.

Patti: You brought up care and we should talk about that. I’d like to talk a little bit about that because that’s a major area of focus that we have to really think and really try and plan and anticipate what kind of care might be needed and who might provide it. Talk about who’s providing the care today and who might provide the care tomorrow.

Dr. Coughlin: My lab, at MIT AgeLab is creating what we hope will be the largest caregiver database. I’m encouraging people to go to our website and sign up to be a caregiver and to reply to what’s being done out there providing care. First thing is, is that caring, as I like to say, is common.

That is, is that one in four American families, or one in three in Europe, are providing up to 26 plus hours per week to an elderly loved one. Here’s the thing that people don’t think about. None of us think of ourselves as care-giving. We’re simply a good partner or spouse or a good adult child. It begins with that phone call saying, “Hey, Dad, how you doing?”

To, gee, making the call saying, “Hey, Dad, thank God you answered the phone.” To appliance repair, transportation, food, and over time that level of effort only increases with disease, events, perhaps a loss of a partner something like that. Care-giving is something that we all do. It is a personal issue that only recently now is getting public attention.

Patti: It’s an important issue. It’s something that needs to be bubbled up and talked about more, not only because of the fact that at some point in our lives, we’re all going to be doing it. It’s like taxes and death.

Dr. Coughlin: Rather we’re all going to be doing it or we’re all going to be receiving it as well.

Patti: Exactly. How can that be delivered in a way that you want to receive it and you can maintain your health, etc. I also think it’s interesting who’s providing the care.

Dr. Coughlin: The first profile of a caregiver is typically a spouse. Often, it’s the woman because they tend to be a little younger in a relationship but often, they tend to live longer. After that, and perhaps most importantly, is and if all these adult daughter or a daughter in law between 47 and 57 years old.

We find that in the lab even in cultures that they say are male-centric. Generally, what that means is the male steps forward saying, “Yes, I’ll help out.” Then steps out of the way, and his wife takes the role on his caregiving.

As a result, by the way, we find that women today, professional women that have all kinds of things on their plate, are likely to have more older adults to care for than they had ever planned on having children.

Patti: I remember with my mom, I was running a company, running a business, etc. We literally chose where my mom live because it was about half a mile from my office. I needed her to be closer that if something happened, I could run over. Believe me, I did many, many times.

Dr. Coughlin: In fact, that tends to be the criteria even for senior housing when we make a decision. A place where mom and dad and assisted living are under-skilled nursing facility. Quite often it’s about quality but within a 15-mile circle of where we live.

Patti: Sure. It’s all really important. Let’s talk a little bit more on a positive topic.

Dr. Coughlin: OK.

Patti: We’ll talk about caregiving. You know what that is? Positive. Again, I find most people want to age in place. They’d ideally like to stay in their own home. I think that one of the things that we want to talk about is how can we do that in a way that’ll keep you safe.

Let’s talk about the phases of retirement. This is 8,000 days. It’s a long, long time. It’s not just one retirement, is it? It’s many retirements. If someone retires at age 62, the first five or eight years until age 70, looks like one phase of life, and then from 70 on.

People redefine themselves. What do you find are the most important things that we want to look for to make that period of life most fulfilling and fun?

Dr. Coughlin: What we should do is rather than think about retirement, the pulling back and withdrawal, we should think about what’s the doing. Not just the vacation imagery that we think about quite often.

As you may recall, we did a study in the lab about the words that we use for retirement. We asked around the country, national sample, “Could you give me five words that define for you, life after work?”

You would think that given the average American vocabulary, being between 25,000 and 30,000 words, that that should be a pretty easy thing to do, to define one-third of your adult life. Interestingly, 47 words came back accentually describing more than half the responses…

Patti: Wow.

Dr. Coughlin: …which reflected either great clarity, or they used a little bit of Boston vernacular where they don’t have a frikken clue is what I would say.

More importantly, the words change not just by age of the people responding but also by gender. Almost universally, everyone is seeing retirement as the vision of an older adult male. We see it around relaxing, retiring, golfing.

We don’t see it realistically as to what it’s going to be. Which, as you mentioned, those multiple life stages, places that we’re going to live, new things we’re going to do, new things we’re going to have to do. Right now, the image or the vision of retirement is profoundly narrow, which is hampering people’s imagination.

Patti: It’s interesting. I think one of the questions, it’s a two-word question, and that is, “What’s next?” Rather than thinking about sitting on a couch, watching television, and being bored to tears, what’s next for you?

As you said earlier, it’s just changing from one cubicle to a different cubicle, or really maybe starting your own business, doing something. If money wasn’t an object, what do you really want to do?

Dr. Coughlin: Patti, you and I have talked about this offline. I think that one of the things your listeners may find somewhat counter-intuitive is that when we think of an entrepreneur, the image is typically some young guy wearing sneakers, a hoodie, writing code at two o’clock in the morning.

We got that kind at Silicon Valley, or we have MIT who would prefer candle square vision, if you will, of what innovation is about.

Patti: I’ll buy candle square.


Dr. Coughlin: That’s not incorrect, it is incomplete. The Kauffman Centre for Real Entrepreneurship has shown that the number two group of people starting new businesses are women over age 50.

In fact, in the UK, even Barclays Bank, years ago, had something called Generation E, Generation Entrepreneur, where they were looking forward to use the UK language pensioners that wanted to start new businesses.

Now, we should be prepared that in the new retirement, it’s about transitions not endings. The idea that we’re leaving one job to not just go from one cubicle home to the couch but maybe to start a new business, maybe to start a new career. Here’s one, maybe going back to school.

The idea now that you don’t have to move to a campus, and you can get a full degree online. For instance, great school like Georgia Tech, for under $8,000, you can get a Master’s in Computer Science online.

We’re talking about not just working, we’re talking about a whole new career. Patti, you’re emblematic of that, having a nursing background, moved to finance. You are emblematic of what I would say is going to be the new normal.

As we live closer and closer to 100 years, the idea that you’re going to have one career. Frankly, we need to stop asking our kids, “What are you going to be when you grow up?” We need to start asking, “So, how many things will you be when you grow up?”

Patti: What a powerful statement and what a wonderful way to really expand people’s minds in terms of what’s possible. People used to refer to me, Dr. Joe, as a case.

This woman’s a freak. It’s so true. How can you take your natural passion, the things that you’re really interested in, and use that to make the difference in another person’s life? To me, that’s what we’re all born to do.

Dr. Coughlin: Also, it’s not just, and this sounds somewhat selfish, we will find that those things are also the things that make us the most whole and most happy. After you take care of the sustenance, a roof over your head, maybe a little bit of playtime and certainly food, after that you start to understand, as we age, what is meaningful.

Patti: It’s so true, Joe. I can’t tell you the number of people that say, “So, Patty, how much longer are gonna be doing this?” I will tell you, I have no plans to retire. This is fun. I do this as a hobby. I’m doing it on weekends, etc., not because I have to but because I love what I do. The meaning that it provides, hopefully, for the people that we serve, but also in my life.

Dr. Coughlin: I see a great convergence coming amongst the generations. Many of us that are boomers and Gen Xers like to tease the millennials. One of the things that’s fun about the millennials is they’re always looking for show. What’s the meaning? What’s my contribution?

Well, that’s a little bit different than what we’ve heard from previous generations, which used to be, “What’s my French baggage?” which is absolutely necessary, but we may see a grand convergence now of older and younger generations saying, “What’s important? What’s meaningful?”

Which means that society and business and individuals may have to re-engineer how we look about navigating 100 years of life.

Patti: I think your point about education is really important for our listeners to really zone in on because that really can re-energize. The things that I didn’t think that I would ever be able to do or learn about, I’m reading books about now.

It’s just really fun to realize that, “Hey, I’ve got a new neural pathway that’s just being built in my brain, where I could actually apply some of this stuff that I’m reading about.”

Dr. Coughlin: Absolutely. In fact, I’d like to say to your listeners that frankly, we’re living in a world where school is never out.

Think about the velocity of technological change, the volume of new knowledge. It has been said in a number of studies, some of them done by IBM, that medical knowledge doubles every 18 months.

The notion that you think you went to college and that you’re good for life is somewhere between funny and frankly, somewhat ignorant.

Patti: Yes, it is, absolutely. I think the idea of going back to school and this lifetime learning, it’s got to be the standard for everybody.

Dr. Coughlin: I think it should be the new expectation. As we start thinking about finance, we think about 529 plans for the kids’ college education. We should be asking, “So, you’re 35, 45 years old. What are you doing to make the business case that you can stay in the workplace by going back to school?”

Unfortunately, I don’t mean going back to school to have a better quality beer than you had undergrad. It may mean a lot of time downstairs late at night finishing those classes so you can be there.

Patti: I think that your point that it’s about lifetime learning, but also the difference between how people learn and the difference in terms of the fluid intelligence versus the crystallized. Tell us more about that.

Dr. Coughlin: Sure. It’s a very simplistic dichotomy, but very useful, is that generally, as we’re younger and we know that we can learn new things often a lot faster than older people. Foreign languages, mathematics, and whatnot. But older adults do have an advantage, and we call it crystallized intelligence, or as I like to say, “We’ve seen that movie before.”

We may not realize it, but part of getting older is also recognizing lots of patterns that we’ve seen over time. Quite often, we can get to a solution, maybe not by driving an Excel spreadsheet until two o’clock in the morning as our younger colleagues might, but by seeing some of the things that we don’t even know we’re seeing, that this is the answer.

The phrase “My gut reaction is…” There’s a lot to be said about that gut, and that is, shall we say, the strategic advantage of older workers. In their heads, in their drawers, in their experience, is the lost knowledge many companies lose when they give them the proverbial package.

Patti: Yeah. The smarter companies are beginning to realize that, aren’t they?

Dr. Coughlin: Yeah.

Patti: They’re bringing these workers back, whether they be as consultants or otherwise, realizing that there’s a wealth of knowledge that hasn’t been documented anywhere.

That gut feeling, “Yeah, I’ve seen that movie before.”

Again, using the scientist as the example, he has been working with this company, and on these various projects, and these compounds for 40 years. They’ve applied these different compounds to different diseases, etc.

That knowledge isn’t documented anywhere, and if and when he retires, that’s going to be gone.

Dr. Coughlin: Frankly, even in less technical professions. Think about those companies that rely on their client relations.

If a problem happens with a given client, they’re going to say, “Gee, who’s that client executive that knows how this client works?” Oh, I’m sorry, Mary is gone.

She took the package. Then you’re lost without that connection.

Patti: I think the other thing that you’re doing here, and by sharing this information, is giving people who are retired that hope. That, OK, you might have gotten that package, but don’t give up because what you have is really important and valuable.

Go ahead and go out to these companies because they need you.

Dr. Coughlin: Yeah, they need you. Companies like Eli Lilly, Procter & Gamble, and Boeing have created an organization called YourEncore, where they’ve pooled a lot of this former lost knowledge into a group so that they can draw upon it later on.

The other thing is, also, don’t be afraid of starting something new, which also means we need to readjust the social contract. Just because you’re a senior poobah here, does not mean you should be expecting to be senior poobah in a new profession.

The new intern might look a lot like a 50 or 60-year-old person, plus, coming in to say, “I want to start a new career. I’ve got another 15 to 20 in me. What can we do?”

Patti: That’s a terrific idea. That is a terrific idea. I’m going to remember that for recruiting new employees because you think about that wisdom and that experience they may have in the workplace or just life in general, and what value that could provide.

Thank you for that.

Dr. Coughlin: When you think about it in the auto industry and customer services industries, quite often, you will see older people in those positions. For instance, on the line in Munich and places like that with BMW, you’ll see that the higher-end vehicles are crafted by the 50 plus worker.

For the customer service, there was also often an older person there because they hear the little nuance, if you will.

Patti: It’s interesting. My husband owns an office furniture…basically does the interiors, built buildings from the walls in. When he was first starting, my father had just retired from IBM. In his infinite wisdom, my dad was sort of tooling around going to diving meets, etc., but he had a lot of free time on his hands, and he was bored.

Ed went to my dad and said, “Hey, would you like to come and work a few hours, a week, or what have you?” My dad loved it.

He was an ambassador for the company. He got to do the woodworking, putting the cubicles together, which he loved to do, and he added a lot of value in terms of the relationship with the customers.

Dr. Coughlin: It’s interesting. As you know, I’m a writer for Forbes. I have articles there on retirement. Some of my best stories in inspiration are somebody who used to go by the name of Vice President that’s now driving for Uber, Lyft, or whatever it might be.

Patti: Yeah, it’s wonderful. Because that’s engaging for that person, too. They get to meet there. They’re out there having fun and doing something.

Dr. Coughlin: Their spouse gets them out of the house. There’s all kinds of benefits.

Patti: Absolutely. I love it. I love it. In terms of overall trends, are you finding that more people are going to that second act in retirement? Is that beginning to take hold?

Dr. Coughlin: It’s starting to take, but it’s, as in many things, it’s about the lifestyle leaders that are making it up as they go along. The story, the gravity of retirement of the time to go away, and to move someplace sunny, is powerful that we think it’s a natural order of things, much like it was applying to school, getting married, having a dog, and all those other things.

Yes, there are people out there on that new longevity frontier that are changing, but this is where I think financial service and financial planning can turn into longevity planning where you don’t tell a client what to do, but you help them think about their options.

Asking critical questions to get them to talk to their spouses about, “Gee, I thought we were going to move to the shore or I thought we were going to move to the mountains. No, I think we were going to stay here.” Conversations that typically are not had and only frankly, taken for granted.

Patti: I think that also it is done in an environment of complete safety, right? It is what it is. Let’s just do some brainstorming together to find ways to make this happen and make sure it is everything that you want it to be and what it can be.

I think that when you think about the different professions and the different opportunities that people have to make that kind of a difference, it’s really a wonderful opportunity. At least from my perspective, to really steer that conversation to make the difference for people as they approach that season of life.

Dr. Coughlin: Patti, as you know, I’m a fan of your practice and how you’ve made this more than financial planning. If you think about it, all the other parts of your life, from childhood to young adulthood to adulthood, you’ve got guide books. You’ve got stores to tell you what to wear, parents to tell you what to do, supervisors to tell you how to do it, college counselors, college advisors.

You get to about 60 and while you think that, “Hey, I’ve got this made.” This is a very new frontier. We’ve got no metaphors other than a few brochures that tell us we should be walking on the beach. No one knows where those same two people on every brochure are walking on the beach, alone, in the distance.

Having these conversations with someone like you gets people thinking, and more importantly, puts it on the agenda and just doesn’t let life happen, but make life better.

Patti: Well, we couldn’t do it without you, Dr. Coughlin. Joe Coughlin, director of the MIT AgeLab. Your research and the work that you’re doing is helping many of us become better advisors and really helping us to do even more than clients would ever expect.

Dr. Coughlin: Thank you.

Patti: I’m so grateful for everything that you’re doing. I’m so grateful to MIT and the Hartford for introducing us in the first place. In the next podcast, if it’s OK with you, what do you say we introduce our listeners to some of the things that you and I have discovered that really make a difference in that last third of life? Things that may not realize are out there. You up for it?

Dr. Coughlin: Sounds good. We’ll do that.

Patti: All right. Terrific. Thank you for joining us. Thank you for those of you who are listening. I am really looking forward to that. All of the podcasts that we do, we have thousands of people who are listening to this podcast now and I’m so grateful to have the opportunity to really make a difference in the lives of the people that listening.

Also, in the lives and the practices, the businesses of other financial advisors. If you’re listening to this, I hope you’re beginning to see how you could redefine what you do for your clients. Let’s change what we do for Americans today to make that last third of life everything that it can be for our clients.

Dr. Joe, thank you so much for joining us again today. This was really fun. Every time I talk with you, I learned more important things and more stats and things that we can…

Dr. Coughlin: Thank you.

Patti: Yeah, what a difference. Thank you also for joining us today. If you have any questions, feel free to visit our website at keyfinancialinc.com.

Let us know if there’s any topics, any questions you might have. We are here to help you and hopefully make a difference in your lives.

Until next time, I’m Patti Brennan. Thanks so much for joining us.

Ep31: This is Not Your Grandparent’s Retirement!

About This Episode

In the first of a three-part series, Patti welcomes Dr. Joseph Coughlin, PhD of the MIT AgeLab to discuss what the new face of retirement planning in 2020 looks like. Dr. Coughlin shares the deadly dangers of social isolation and why the last 8000 days of life during retirement is often difficult to navigate. “You don’t try it on, you don’t taste it or take it for a test drive”. Patti reveals how she, as a trusted advisor, collaborates with her clients to successfully plan their retirement through longevity planning.


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

I am so excited to introduce the guest that we have today. Dr. Joe Coughlin is joining us from MIT. He flew in this morning to join us to talk about the work that he’s doing in the AgeLab. Joe, welcome to the show.

Dr. Joe Coughlin: Patti, it’s great to be here. Thank you for having me.

Patti: I want you all to know that I’m like this wannabe geek watching and listening to Dr. Joe Coughlin. I’ve been up to the AgeLab. It’s been a joy to learn from you and learn how we can make a difference in the lives of the people that we work with.

Joe, if you could, and by the way, let me give you a little bit of background of Dr. Coughlin. He’s just unbelievable. He got his PhD. He’s a senior contributor to “Forbes.”

In fact, you just wrote an article this morning for Forbes, right?

Dr. Coughlin: Yeah, this morning, on social isolation. “Retirement Risk That Can Truly Kill You.”

Patti: Now, tell everybody the story that you told me about the…

Dr. Coughlin: It’s a horrific story. It really kept me up late in writing the piece.

It’s about this poor gentleman, a Navy vet. A decorated Navy vet, in his 50s, worked full time as a defense contractor, traveled frequently.

His mother, who would call him on his birthday, and frequently, lived out of state in Texas, couldn’t reach him. She called the police.

They said, “Well, look, he travels a lot. He’s an adult. We don’t do missing persons on that.” Years go by.

Patti: Years?

Dr. Coughlin: Years. Three years to be exact.

They recently found him dead on his kitchen floor for the third Thanksgiving in a row. Social isolation kills.

In fact, it’s been equated in the literature as being the equivalent of smoking 15 cigarettes per day. The piece I wrote in Forbes is really emphasizing that retirement planning is – you and I have talked about, Patti – needs to be about longevity planning.

It’s not just about financial security. In fact, it’s a new social security that we need to talk about. How do you stay engaged, and have meaning, and have people around us to check in on us?

Patti: It’s all about providing that meaning, having that purpose, living more fulfilling lives. In your book, “The Longevity Economy,” which is, just for those of you out there, you got to get this book.

It really is talking about you. You’ve talked about the trends that are occurring in America today.

Frankly, how businesses can take advantage of it, and what we need to be aware of. I found so many of the statistics you talked about so interesting.

Really, how we need to revisit this perception of retirement, of aging. Tell us more about that.

Dr. Coughlin: Well, as you know, there is a premise of the book, and this is where a lot of people either chuckle or take umbrage, is that old age is made up, and by definition, retirement is made up as well.

If you recall, the whole idea of old age and retirement came out of British medical literature, suggesting that you were born with, or imbued with a certain amount of vital energy. If you used this vital energy badly, which for you listeners means anything fun…

…that slowly…

Patti: OK. I’m a dead duck.

Dr. Coughlin: Exactly. Life worth living.

If you used it badly, that slowly, you would be drained of that energy. You would suddenly no longer be a full glass. You’d be a glass half empty.

You’d be so tired from this loss of energy that you would have to retire.

Patti: Interesting.

Dr. Coughlin: There’s this nice linear line of retirement, to retirement homes, to, for many of us that are old enough to remember the phrase funeral homes.

These stories actually create narrative that we actually are laws of physics, when, in fact, frankly, the whole idea of retirement from work, retirement and loss of energy, or time to rest, are only about 100 to 150 years old.

Patti: That’s fascinating. That is really fascinating. Tell me as I have learned MIT is known for data, data, data, right? Data to me…

Dr. Coughlin: Technology is the answer. Now, what’s your question?

Patti: Exactly. Right, right, exactly. What’s cool about it and what I think is terrific is that the AgeLab at MIT is the third largest database at MIT.

Over the years, you’ve pulled together information and data, and applied that data, and used your research to really bubble up interesting things, even inventions.

Tell us more about that. What’s the coolest piece of research that you think you’ve…

Dr. Coughlin: First off, as you know, the AgeLab is not just multi disciplinary as in lots of psychologists, and engineering, and data science, as well as anthropology, and medical sociology, political science, if you will.

What we’ve really done is we’re multi disciplinary, but also multi domain. We want to learn about that new future of old age.

The longevity economy through the lens of the consumer, the user, the person, the family if you will. That means we’re looking at transportation, we’re looking at housing, care giving, and of course, financial planning, and retirement planning.

Over the years, we’ve done work in all these areas and have amassed amazing data sets that are not just surveys and focus groups, but for instance, physiological data from the car. How stressed are you behind the wheel? Skin conductants, eye movement data, video data on how you respond to choosing financial products, to how you provide care, to how you drive the car of the future.

I’d say some of the most exciting things is the fact that we’re able to integrate all these things into one vision of how people behave, what they want. How can businesses excite and delight? How can families provide ideal care?

Patti: It’s interesting because when you talk about retirement and you talk about old age, it is not a burden to relieved, it’s an opportunity to be created. It’s so interesting because that’s such an important focus that I have. Maybe it’s my nursing background, Dr. Joe, because I just really believe that we got to look at these things holistically, the whole person.

Your money’s really a means to an end. What exactly are we trying to accomplish and this opportunity to be created that you talk about is so important. I literally just had a meeting yesterday with a scientist. He is a gentleman who has worked on cancer for his entire life and has made incredible discoveries.

He’s in his late 60s. He’s been so devoted to his work and he’s beginning to think about this thing called retirement. He’s kind of pushed it off, pushed it off, etc., thinking I don’t know what I’m going to do. I don’t know how I’ll spend my time.

Dr. Coughlin: It’s also about his identity, not just his time.

Patti: It’s been really important because I’m encouraging that conversation because why retire if you’re just going to watch TV? Right? That’s not the idea of an ideal retirement.

It was interesting because yesterday, thanks to you, I began to start asking him questions. One of the questions I asked was your question. Tell me, what are the little things that make you smile?

Tell me more about your happy place like if you think about what makes you happy where are you? Who are you with? What are you doing?

This client’s been a client of mine for years. He loves collecting rocks. In fact, they travel all over the world. He’s a big rock collector and he’s a woodworker. He got so jazzed up talking about rocks.

It was the funniest thing. His wife was like, “Oh, yeah, Patti. You should see our house. We got rocks from all…” It was just all of a sudden he began to think about what life in retirement is. I asked the question how much time do you have doing the woodworking? He said, “I don’t have any time.”

It was really cool to begin that visualization, that brainstorming in terms of what retirement looks like for him so that he can seamlessly go in and begin doing those things that he really loves to do.

Dr. Coughlin: It’s amazing. I actually have a woodshop that built in my basement.

Patti: Really?

Dr. Coughlin: I’m never there. Also, you’ll get a kick out of this, many of your listeners may identify with this, the majority of baby boomers consider themselves gourmet cooks.

For those who have the resources, many of them build out very great gourmet kitchens, of which they never use because they’re either not home, don’t have the time, or whatever it might be.

Patti: Oh, yeah. We have a Harley. I got a Harley right in my kitchen. My husband loves to cook. He’s there, etc. Ask me the last time we turned the thing on.

Same thing. We have all these visions and these ideas, but really taking the time to enjoy them.

Dr. Coughlin: I think in the spirit of asking those questions that to me, is the essence of what I’ve been calling the longevity planning, which is not to tell people what they’re going to do. Not to ask what their vague goals are going to be 20 or 30 years out, but to find out what makes them tick. What are the little things, as you say, that makes them smile?

Often, sometimes even spouses don’t even know. Having the morning paper with a blueberry muffin could be a success for that day.

Patti: Your point is well taken. They don’t even know what retirement is going to look like.

Dr. Coughlin: None of us do.

Patti: To be honest with you, I think that’s part of my job. I tell people all the time, I’ve been doing this for over 30 years. I’ve helped over a thousand people retire comfortably, seamlessly, and use their legacy, use their assets, again to live their very best lives. You get to do it once.

Dr. Coughlin: Yeah, exactly.

Patti: Hopefully, I can use the resources that we have, the experience that we have, to make it as easy and fulfilling as it possibly can be. One of the things that is also interesting that you’ve taught us, again, I keep on referring to teaching us. Thanks to John Diehl in the Hartford Group.

By the way, let me do a sidebar, if you haven’t listened to the podcast that John Diehl and I did, we did three podcasts earlier in the year. Folks, if you’re listening, they are the most popular podcasts we have on the program, and thousands of people are listening to this podcast right now.

I’m really surprised how viral this is becoming. John Diehl’s podcasts are the most popular. Again, through the work that Hartford is doing with MIT, they are leading the charge in helping people like me, advisors, develop this model and become what I think is really going to be important for the future of providing a real service to our clients.

Dr. Coughlin: As you know, Hartford has been a long term sponsor. John and I are not just good friends but co conspirators in trying to…I would suggest to push the industry, the financial planning industry, to an entirely new frontier around longevity.

To steal from John, in many ways, money is like electricity. You absolutely need it to do everything you want to do, but that alone does not tell you what to do, how to do it, or what you’re going to enjoy.

The industry and the work that you’re doing, Patti, and your advisors here, starting to not just chart, to curate, and coach, and collaborate with the clients and outside services to envision what their futures going to be is indeed the future of longevity planning.

Patti: It sure is. We’re not going to do it in this podcast but in another podcast, probably the second or the third. We’re going to record them today. We’re going to talk about some of those services that we’ve curated and we found to be very helpful for people who are our clients and people who are listening. That will be a lot of fun.

One last thing, I also found it interesting, in terms of your research and the difference between men and women handle this thing called retirement. I had people in earlier this week and it was really interesting, very comfortable, very wealthy CEO of a company. They’re really nervous about what it’s going to be like to have him around.

As I was thinking about today’s podcast and that subject of men versus women, I was reminded that…I was thinking about this weekend. I had a bunch of girlfriends who we all got together, Friday night, went to the movies. I can’t imagine our husbands doing that together.

Dr. Coughlin: Guys aren’t socialized that way, enjoying.

Patti: Yeah. What does that really mean in terms of this experience called retirement, and what is the difference between men and women?

Dr. Coughlin: As you know, I write for Forbes. In a recent article I wrote on Forbes, I did a little bit of back the envelope calculation that will scare perhaps a number of couples that are listening, particularly the wives.

Because in general, we only spend six waking hours during the week with our spouse, and that counts showers, bio breaks, eating, going to the grocery store, and everything else.

Patti: Wow.

Dr. Coughlin: If you retire Friday at five o’clock and show up Monday morning at home, you just went to 16 hours a day on average that you’re going to be spending. I cannot tell you how many women I’ve interviewed in focus groups, and the like.

I don’t know who this person is on my couch, but he wants me to make him lunch, and wants to know what we are going to be doing the rest of the day. Well, we have a schedule. I don’t know who he may be. There’s real challenge there.

Patti, the point about the difference between men and women in retirement is that you don’t need to go to MIT, though there’s a difference between boys and girls. I know I’ll catch flock from a lot of the men in the audience. Women do more.

What I mean by do more, their roles are not just professional roles in being a wife or a partner or even a mother, but they’re also caregivers who’re doing the shopping, or the chief financial officer of the house. Even if they don’t make the money, they know where it’s spent, and how it’s done.

Also, to your point about going out with the girls on Friday nights, they also are, in many cases, the chief social officer, versus men. Even the millennials that I’ve been watching of recent date are pretty focused on that 8 to 10 hour a day during the day.

Men more than women are more likely to use the phrase, “So, after I know your name, the second question is, what do you do?” I would suggest, in retirement, the two most scary words that mostly men have to articulate was, “I was.”

The first year is, “Well, I am.” After about a year, they look down on their shoes and they go, “Well, I was,” and then they look to their spouse typically and say, “Well, what are we doing now?”

Given the fact that the highest of worse rate in the world is amongst the 50 plus, so called grey divorce, her response quite often is, “I don’t know what you do, but I no longer do it with you.”

Patti: Oh, my goodness. That is interesting. It is a period of life where we redefine ourselves. Who are we? What’s our purpose? What are we going to do with our lives? How do we add value to the people around us? That’s scary when you’ve done the same thing for 30 years, 40 years, etc.

It’s also interesting to think about in terms of psychologically women are used to the drill…

Dr. Coughlin: Yes.

Patti: …and are used to all of that. Whereas men, I would imagine the depression really begins to set in.

Dr. Coughlin: Yeah because that sense of identity, social network, and purposes wrapped around the job. The only thing that women on why they come out differently in retirement is they see older age when they’re far younger. They’re the caregiver. They’re the ambassador of their parents and in-laws, in many cases.

The number one profile of a caregiver is, first, the spouse. Secondly, the oldest adult daughter. She knows that this is not going to be all golf courses and beach walks. She, generally speaking, plans a little bit more ahead. Or, should we say, has a more realistic vision of what those years are going to be.

Patti: It’s a great point. A lot of people who come in to see us, and a lot of people in general, are having unrealistic expectations of what this thing called retirement is all about. John brought it out in our podcast. There is so much golf a person can play, and beaches that you can walk on.

Dr. Coughlin: You’ve heard me tease your colleagues and fellow advisors. The new brochure cover is all going to be sitting at cafes along river walks while other people look exactly like us are riding bikes going by.

Patti: Exactly. It’s a forest. What does it really look like? If you were to think about the mistakes that people make as they enter that phase, is there anything that your research has bubbled up in terms of what’s the biggest mistake people…?

Dr. Coughlin: So far the biggest one that comes to mind is underestimating. This is a quote I get over and over for people that have been living in retirement for a number of years, “Just how long it’s going to be.” It’s a retirement in the classic sense of 62, 65, even frankly 70, is a long time.

Even those of us who have passions and hobbies and maybe even do want and play golf, you have seven days a week. That freedom can be a sentence if not understood, that you’ve got to fill in a lot of activities.

We typically have very short term goals – is the second mistake. We talk about we’re going to spend more time with the grandkids. All of us who have children know that by the time that kid gets to be 10, they’re too busy to spend a lot of time with grandma and grandpa, unfortunately.

Patti: Absolutely.

Dr. Coughlin: A trip to Disney – that’s one week a year. Now, what about the other 51 weeks? Probably, the third one is that knowing that they’ve got to work on their relationship with their spouse. You’re a new and different person at that point. New career, new aspirations, new needs, with their health and emotional and the like.

Time, knowing exactly what you’re going to do, and renewing those vows as to what that next third of your adult life is going to be.

Patti: What I love about your work is how you frame things in 8,000 days. It really is a good, really important point because that’s a long time. 8,000 days is from the age of 0 to age 21. A lot happens during that period of a person’s life.

If you think about life being four segments of 8,000 days and retirement being the last one, imagine that life of 0 to 21, except you’re an adult in your 60s, in your 70s.

Dr. Coughlin: While envision is a little closer as you’re an adult, that period from 21 to the late 40s, so-called mid-life crisis. In between, you had education, marriage, maybe children, two or three houses along the way. That’s the same amount of time we have to plan for in retirement.

Patti: A lot of people think about retirement being about the financial aspect of things. I do tell people, “It is the most expensive thing you’re ever going to buy.”

Dr. Coughlin: You don’t try it on, you don’t taste it, you don’t take it for a test drive, and you don’t do a walkthrough.

Patti: How about that?

Dr. Coughlin: We’re making this up as we go along, in some cases.

Patti: That’s where it’s hard, and that’s where having an opportunity to brainstorm and walk through what does it really looks like. It’s not just about the numbers. The numbers are important, we’ve talked about this before. That’s table stakes.

Performance…Every advisor should be delivering performance. That’s what we need to do.

But it’s more to me about outcome. What exactly are we delivering the performance for? What’s your ideal outcome? Let’s do some brainstorming in terms of what your life is going to look like and how this money’s going to support that vision.

Dr. Coughlin: One of the things that’s never really been done – because most people don’t realize this – is that while there has been retirement, it has never been this context of longer lives, families that are more fragmented and mobile and whatnot.

One of the great innovations that you do, Patti, and that others should do as well, is to ask the questions. You’re right, money’s the table stakes, but where are you going to live? What are you going to do? What makes you tick? Not just the, “Gee, I’m going to golf, or God knows how many years, I’m going to buy a place on the beach.”

For instance, how many spouses – and our research indicates not many – have actually had the conversation about where they’re going to live in retirement?

Patti: I was just going to say, Joe, a lot of people move several times in retirement. They buy that second home, they try it out, they live there, then they move back. To ask those questions not just once, but over and over again, because you might get one answer when they’re 62 years old and quite a different answer when they’re 72.

The kids might have moved across the country, friends might have passed away. They might be having some health issues and they want to move closer. I had a client who lived at the beach, and they realized that they were pretty far away from good medical care, so they ended up moving into an area that they never anticipated.

Dr. Coughlin: Something that you may find fun, but will also give your listeners a way of thinking about it to your point, is I think that there’s probably at least three moves in that latter 8,000 days. There’s the classic downsize, the house is too big or yes, we want to move to the beach.

But then what you just described, I call the “right size,” which is maybe one of us is ill or wants to be closer to the adult children, so they ricochet back to the Northeast after having lived in Florida or Arizona.

Then sadly, eventually, one of us is going to be “solo size.” Think about that, we’ve never really envisioned three moves in retirement.

Our parents didn’t do that, generally, and our grandparents certainly did not. Today’s planner, today’s retiree, these folks are hacking or charting a whole new frontier of longevity.

Patti: They’re winging it. A lot of times they’re just winging it, and that’s where it gets dangerous. Because once you retire, you pretty much have whatever you’re going to have, and then it’s a matter of how that spans out. Modeling those things.

I believe that there’s always a solution. I believe you can pretty much have whatever it is that you want.

It’s just a matter of being thoughtful about it and making sure that you’ve pulled the different resources and are realistic about what’s OK and what’s not. The boundaries, the guardrails, right?

Dr. Coughlin: Right.

Patti: Well, Dr. Joe, I can’t thank you enough. This has been phenomenal.

We’re going be talking about some additional things. Again, I want to put this as you say so well, “We’re going to give you bites, not breakfast.”

Dr. Coughlin: Right.

Patti: Give it to you a little bit at a time. Folks, thank you so much for joining us today.

What a wonderful, wonderful opportunity to have one of the leading researchers in America talk about something that really isn’t being talked about enough.

If you have any questions, please feel free to go our website at keyfinancialinc.com. Thank you so much for joining us again.

I’m Patti Brennan, and we will see you again, real soon.

Ep30: Choosing your Medicare Strategy – What’s the Best Plan?

About This Episode

With just two weeks left in Medicare Open Enrollment, Patti continues her discussion with the nation’s leading expert on Medicare and health related costs, Dan McGrath. Together they strategize the best options given a subscriber’s age and income. Real tax optimization and cost saving solutions are offered that can be implemented now before it’s too late! This is the 2nd episode in a 3-part series in which Patti delves into the confusing nuances of the Medicare Program to provide clarity and timely solutions.


Patti Brennan: Hi, everybody. Welcome back to the Patti Brennan Show whether you have $20 or 20 million, this show is for those of you who want to protect, grow and use your assets, to live your very best lives.

Joining me again is Dan McGrath.

Dan is the expert on Medicare, and all of the different plans that are available to retirees and really is focusing in this podcast on the strategies, the things that we all need to think about as you’re applying for Medicare, even if you’re on Medicare.

What makes Dan unique is that he’s not out there selling anything. Dan’s role, and by the way, he’s testified in front of Congress.

He is really an active, active person as it relates to these issues because he sees how crippling it is for people who are retired. What makes him unique is that he’s developed software programs for people like me so that we can model different scenarios and really help clients make the right choices.

He is so far ahead of anybody else in this area. Folks, you’ve got to listen to these podcasts that we’re doing. You’re going to be shocked, as I was, as we were getting to know Dan, of all the little nuisances and the things that we need to look out for going forward.

What’s happened in the past, is the past, but there were laws that were passed, as we all know Obamacare being the most significant, affecting this area that are really going to impact the cost for your healthcare going forward. If you thought it was bad before, just wait.

Dan, thank you again for making the trip. Five or six hour drive from…

Dan McGrath: Six hour drive. Three o’clock in the morning.

Patti: Thank you so much.

Dan: I live New Hampshire. The office is in Boston, Mass. People will be able to tell from the haircut after this.

Patti: We’re not even going to talk about the accent.

Dan: There is no accent. Where’d the pilgrims land?

Patti: Oh boy. Oh boy. Here we go.

Dan: They landed in my backyard. I speak original. Everyone else talks funny.

Patti: Oh, you are too much. You are too much. Now let’s summarize. For those of you who didn’t get a chance to listen to the prior podcast, let’s quickly summarize the two main plans.

Dan: Original Medicare – which is Part A, Part B – your own prescription drug plan, and a supplemental plan – most likely Plan G. Then there’s Medicare Advantage Plans – Part C.

Patti: Notice, everybody, that when Dan is talking about Medicare, it’s not just Medicare. It’s Medicare Part A, Part B, Medigap policy, and prescription drugs. In our opinion… In my opinion, if you can afford it, you want all four of those. You really want to be involved. The other option would be to go with a Medicare Advantage Plan.

If you listened to the prior podcast, there are advantages to both plans. This is not a one size fits all approach. You need to understand the differences and the nuances and the risks that you’re taking, if you choose one versus the other.

Please, if you haven’t listened to it go back, wait to hear some of the stories that we talked about in that podcast. Now we know the issues. We know the choices. Let’s talk strategy, because one of the things that a lot of people don’t realize is that in Pennsylvania, it’s one of 41 states where the cost for the plan are age based.

As you get older, it automatically increases on top of what the government decides they need to increase the costs. For example, even if the government said, “OK, we’re going to keep the cost the same,” in Pennsylvania, from the ages of 65 to 66, your premiums is going to go up 2%.

Dan: Yes, without a doubt.

Patti: That’s the minimum. As we get older, the risk gets higher because the risk of a need gets higher, so that really escalates. The issue that we’ve seen is that as people get into their 70s and 80s, because it’s taken out of Social Security, what happens to social security?

Dan: Thank you for bringing that up.

Patti: You’re very welcome. I’m here to serve. What we’re finding is that Social Security, your monthly deposit is shrinking.

Dan: Thankfully, Congress created this thing called the hold harmless act. The hold harmless act states that no one Social Security benefit can be decreased because of too high of Medicare Part B premiums, but what does that mean? Since it can’t go down, it can’t go up. That’s the big problem. It can’t go up.

Patti: What’s interesting about that is, with inflation being as low as it’s been over the last 10 years, because it can’t go up, if you will. What’s happening is the medical costs are not going down. What’s happening is Medicare is having to find ways of ramping in their spending, because they’re not getting what they need to cover the cost.

Dan: In Medicare’s defense, they are not especially if you read the Medicare Board of Trustees report. This is actually a very well thought out one this year, they’re all very well, but when they’re talking about projections, and when they’re going to be broke, it’s 2028. It’s happening faster. It’s all because they can’t raise the premiums to where they actually need to be.

Patti: It’s a real big issue. They’re looking at different ways of controlling their costs. You’ve got to listen to the prior podcast to hear some of the stories and what’s happening there.

Let’s focus on strategy. One of the things that we discussed was that, this is not something that you do three months before you’re ready to claim. It’s something that we need to be talking about six, seven, eight years ahead of time, and really to project out what your sources of income are going to be because that ultimately is going to control the costs.

One thing that we do want to make everyone aware of is, we talked about this thing called IRMAA, which is a surcharge. It’s an extra tax for the cost of Medicare. But the year that you retire because Medicare looks at the prior two years of income to determine what your tier is there is actually a form that can be filed that will put it in the show notes.

I always forget the form number that you can submit.

Dan: It’s a re assessment, or revaluation.

Patti: Exactly. To say…

Dan: It’s a one page report.

Right? We’ve had a qualifying event, so please don’t charge me based on the income that I’ve earned in the last two years. I just retired and I’m not going to earn near that income going forward. It’s not to say that they can’t claw back because if your income does. If they charge you just the bass premium, they can call back and get that additional…

On the flip side on Medicare. What you’re discussing is when people turn 65, on whenever they retire Medicare it’s no longer a two year look back. It’s now a three year look back. But it’s only a two or three year look back depending on your state. We can attest for…I was just in South Dakota.

It’s a one year look back. The reason being is how many people live in South Dakota? Social Security can keep up to South Dakota. The city of New York, it’s a three year look back.

Because they just can’t keep up with everything. What this means whenever you retire, Medicare is going to look back at your income three years. If you live in Philadelphia, they will look at your income three years, you were working. You weren’t retire, you weren’t on Medicare. You were working and let’s say your income was $200,000, and you’re single.

You’re going to pay 200 percent more of whatever the Part B premium is in a surcharge of about 200 percent more in your prescription drug coverage. Now you have a qualifying event. There are five qualifying events.

The first one being married, divorced, widowed your tax status change. The second qualifying event is, you’ve cut your hours, you’ve reduced hours you retired, whatever it means. That will be your qualifying event.

The third is you lost rental income from an event out of your control. Ultimately you have apartment buildings, hurricane came, you lost your rent. The fourth reason is you added an unscheduled suscitation of a pension plan. The fifth one is you had a scheduled suscitation of your pension plan.

Those are the only five reasons that your income can be dropped on a reevaluation. You retire at the age of 65. They look back at your income at say 63/62, they say you’re paying way too much. You’re going to file a one page report. You’re still going to pay Medicare’s IRMAA for that year. You’re not out of it. It’s still going to be paid.

But you’re going to get a check at the end of the year. Now where Medicare is great, is let’s say you didn’t pay any attention. They didn’t come in and meet with you, didn’t meet anybody from key financial at all. Then six, seven years down the line you find out looking through records, you were paying…

Patti: Much more than you were supposed to…

Dan: …supposed to be paying. This is why Medicare is wonderful. You file a reassessment, they will look at you from the beginning of when you started Medicare. If you weren’t supposed to be paying Medicare’s IRMAA at all, they give you the whole check. They refund it all back.

That is… OK, that is the takeaway, everybody. Those of you who are listening, if you are retired, you should really take a look at what your Medicare, what your premiums were and whether you were hit with that additional tax.

For those that do get hit with Medicare’s IRMAA, you’re going to get a report or social security statement. It’s either going to be January… December/January. If you are in Medicare we can tell you already. If you get an envelope package, it’s a little bit thicker. You’re going to get 11 page report.

The first two are talking about your Social Security benefits. The next nine pages are talking about Medicare’s IRMAA, and what you can and can’t do.

If folks want to do that, how do they go about getting that…

It’s literally contacting Social Security, going online. I call it revaluation, someone will call it reassessment. I believe it’s H 31. I forget the actual number of the form.

Patti: One of the things that we were talking about offline, and you’ve said it a couple of times here, Medicare is great. It’s the best system out there. It’s making sure that you have the right coverage. You mentioned their website, that the website is actually a lot more robust than people realize.

Dan: That’s another reason why we encourage people to meet with a financial professional. One of the parts of Medicare is prescription drug coverage. When you get prescription drug coverage, here’s the big thing that everyone’s freaking out about, going on a tangent sort of.

Patti: Yeah, go for it.

Dan: While everyone’s working, there is no decision on your health care. Unless you’re a sole proprietor, small business owner. You go to work, your company pick a role plans, money comes out of your paycheck, you don’t even take two thoughts to what’s really going on.

Once you go on to Medicare, it’s 100 percent you. You’ve got to make all the decisions. Now when you buy a prescription drug plan, or even if you go on a Medicare Advantage plan that rolls your medication coverage with inside the plan, you still have to, on your own match the medications you’re taking to what the insurance company will provide for coverage, or formulary.

The best site on the face of the earth for this is Actual CMS.gov. You go to Part D. Sorry, I keep talking with my hands. You go to Part D [laughs] , you click on Prescription Drug Finder. You don’t even have to put your real information in. You can put in fake information, just please put your real medications in. Then they’re going to want to know your zip code.

You’re going to list all of your medications. They’re going to tell you which is the most robust plan which covers the most of your drugs. Then they’re even going to tell you which pharmacy you need to go to, for access to all the medications. You can’t get that anywhere else.

Patti: That is fabulous, and that is so important because when we talk about the cost of health care, it really comes down to the prescriptions, doesn’t it?

Dan: We talked about two sides of the house. Original Medicare, Medicare Advantage. I’m not saying that you’re not correct. You are 99.9 percent correct. The largest cost is somebody that goes on to Original Medicare and doesn’t get what is known as Medigap Plan G policy. Can’t buy F anymore.

Let’s say you still want to get a supplemental plan, but you get A. There’s this little thing called the access charge. The access charge is what physicians can charge you on top of the bill. Now G covers it. But if you don’t have G, you don’t have it. Now think of it. A doctor goes in and does a heart transplant. How much are they charging?

We don’t know, we could be hundreds of thousands of dollars. We have no concept, but you’re going to get hit with a 15 percent bill unless you have this coverage. Take that example out because we have it covered through G Plan, because if they met with key financial…some savvy financial advisor, you are 99.9 percent accurate. Your biggest costs are your prescription drugs.

Patti: Even with the G Plan, even with terrific coverage, people are still experiencing significant thousands and thousands and thousands of dollars of out of pocket costs.

Dan: Med drugs.

Patti: Because of the drugs.

Dan: 100 percent.

Patti: I think it’s fascinating. We were talking about the most expensive disease. The most expensive disease is as you said…

Dan: Type 2 diabetes.

Patti: Type 2 diabetes.

Dan: Keep eating carbs. Carb up.

Patti: Boy, it is amazing. Folks, most of us think it’s cancer. Actually cancer’s also very expensive.

Dan: Yes, but there’s a key reason why cancer isn’t as expensive as Type 2 diabetes. Now to put you on the spot.

Patti: OK. Tell me.

Dan: Because you die.

Patti: Oh, right. Right, that’s a…

Dan: You did oncology, you do God’s work.

Patti: Yes, absolutely.

Dan: You were the angels. Unfortunately, in most times looking at people, because we go into nursing homes, we go into assisted livings. That’s what we do. You want them. Unfortunately you don’t want anyone to ever die. But there is somebody suffering with bone cancer. I want them to die…

Patti: Oh, it’s excruciating just to watch it. It’s so painful to watch. We’ve got the different diseases, we’ve got the different meds, medications. Sorry, my nurse is coming out, we called them meds. “What meds are you on?”

Dan: [laughs]

Patti: This wonderful site, you can go on the site and figure out who will cover most of your medications and how much. I think it’s interesting because even though the company might cover your medication, they might cover 40 percent of the cost. You’re still out of pocket for 60 percent.

Dan: Yes, plus the copay and deductible.

Patti: Right. This is where the issue really comes into play.

Dan: It also gets worse. I will say, what’s happened in the last five to seven years, we can say it’s because of the Affordable Care Act. Doctors have become more aware of what they’re doing. Let’s say you’re on Medicare, you have a certain prescription drug plan. You’ve covered the drugs you’re on. Let’s say you’re 100 percent covered. Nothing’s out of pocket.

You have, I don’t know. Let’s say I’m going to come up with angina just because my mentality. You go into a new treatment. It’s the middle of the year. Let’s say it’s March. You go to the doctor, the doctor says, “OK, here’s a med, here’s a script for this drug.” They’re giving you brand name not covered on your plan.

Because it’s not part of the formulary. You can’t change your formulary, you’re now stuck…

Patti: …out of pocket 100 percent.

Dan: 100 percent, and it’s a brand name. What doctors are starting to become aware of, the very good doctors have been doing it for years, but all doctors are starting to do it. It’s brand name or generic. They’re writing the script. Then it comes down to what’s in your plan so that’s the other catch that people have to be aware of.

When you retire, you don’t just let yourself go, and go to Denny’s every single breakfast and go to Chick fil A even though it’s fantastic. Go to Chick fil A for [laughs] lunch every single day. You have to be in health because this is going to impact your overall retirement plan as well.

Patti: I thought it was fascinating. We were talking offline also about Obamacare, and all of the different little nuances in Obamacare that are affecting Medicare, prescription drug plans, etc. Let’s talk about that.

Dan: The big thing that happened there was the extension of patents. It is not just the Affordable Care Act. President Bush had a hand in this…President Bush first…there’s a tier structure when we talk about medications. Tier structures a very simple. Tier 1 is generic drugs. They’re the cheapest medications you can get. Tier 2 are lower brand names, higher generics.

Tier 3, our brand names and the way it used to be covered was, you paid 5 percent for copay plus your deductible back with George Bush was, I believe, roughly $1.75 to $2.25.

You’d have to pay for your deductible out of pocket first before your insurance kicked in. For every generic, you paid five percent. Every Tier 2, you paid 12 to 15 percent. Every brand name, you paid 25 percent. Everyone wanted generics. He then created a new tier structure, Tier 4. Those were for living organisms.

Patti: Which we all are.

Dan: Yes, and believe it or not, we use penicillin. We use living organisms without even knowing that we’re using them. What ends up happening is as that structure goes along, he creates Tier 4. Tier 4 goes from a 25 percent copay to a 32 percent copay.

Now, the Affordable Care Act comes in, and in order to pay for the Affordable Care Act, what they do is they create a fifth tier. That’s an injectable. That’s your EpiPen.

Now how they end up paying for it is they extend the patents for Tier 4 and Tier 5. What ends up happening is all those copays, the whole tier structure changes.

Generics are a little bit higher than five, but for most plans, they’re five percent. Tier 2 drugs are anywhere now between 15 to 20 percent.

Tier 3 drugs are anywhere between 25 and 30. Tier 4 and 5 is over 50 percent.

Patti: Wow. You are really out of pocket for a lot of this stuff.

Dan: On top of it, the example that we give is rheumatoid arthritis, Enbrel. Enbrel, I used to use as an example all the time.

I used to carry it in my wallet with the day’s. Everyone has the day’s price of gold. I would show everyone, here’s today’s price of Enbrel [laughs] .

The reason why Enbrel works is it actually helps what is known as rheumatoid arthritis. What happens once you take Enbrel, is Enbrel changes your cells.

It allows you to be able to function. You no longer have pain. The problem is once you come off Enbrel.

Patti: You’re back to square one, maybe even worse.

Dan: It’s worse because your cells change.

Patti: Yes, right.

Dan: Where I live, Boston Herald wrote an article about it in 2014. I was called in, discussed it, and had to explain to them what happened.

There was a gentleman by the name of Ken Haggleson. He’s a nobody. He’s a nobody. He’s just a dock worker, retired, lives in Dorchester. It’s, at the time, it’s been gentrified, but at the time, blue collar work. He went into his local pharmacy. He was paying $40 a month for Enbrel. He went in June and in July, his Enbrel was $880.

Patti: I’d heard about this story.

Dan: What happens is, Enbrel, because of the patent extensions to afford the Affordable Care Act, the makers of Enbrel awarded everybody by jacking up the prices to about $65,000 a year.

Patti: Right. Unfortunately, because of the patent extensions, there’s no competition.

Dan: No competition. He’s stuck. His argument is, there is no generic. That doesn’t exist. The only drug I can take is Enbrel.

Patti: If I go off of it, I’m going to be…

Dan: I’m going to die a painful death. What do I do? There’s literally nothing he can do.

Patti: Wow. I understand that the pharmaceutical companies need to be able to charge a certain amount of money, retain the patents because it takes so long and costs so much money to bring a…

Dan: Yes. The FDA gets in the way.

Patti: …bring a drug to market, and so many of them fail. You don’t want to take away their innovation, or their desire to go ahead and continue to try to bring new drugs to market. At the same point, it becomes confiscatory if this person is, there’s no way he could possibly afford that.

Dan: Not only that, the harder part was when you sit down with the makers of Enbrel, I think it was Merck, their comment was, “Well we have to charge this much. We’re the only providers. Think of all the costs we have to do since there’s no competition to make all these drugs.”

Wait a minute, if you just allowed other companies to make it, the prices wouldn’t be so high.

Patti: Exactly.

Dan: Now, this is where, if you take a look at where we’re headed as a government when you talk about the cost of medications, the innovation, the technology, what we’re starting to hear from this covered administration, and the former administration was aware. They were talking about it.

I have yet to hear anyone running and I’ve yet to hear the person that everyone is running against bring the subject up again, which is alarming. The key is, when we talk to people, and we don’t. We talk to you. When you come to us, you as a financial professional come to us because we act as a back office, somebody that helps in every aspect of healthcare.

We’ll tell you, “OK, they’re on these medications. You’re going to look at other entity markets. You’re going to go to Mexico. You’re going to go to Vietnam, you’re going to go to Taiwan.”

Patti: I don’t know, Dan. I don’t know if I want to go to those countries and get my drugs from there.

Dan: We’re not arguing that you should or shouldn’t, all comes out of price. What can somebody afford? The issue that we have, and it was brought up two years ago, just prior to the last election, because the gentleman was using it as part of his campaign promise. We haven’t heard it.

We heard it from the former president, but we never heard it again. Medicare should be able to negotiate with pharmaceutical companies.

Patti: Sure, that makes sense.

Dan: Other countries have to start fitting the bill for all this innovation. You want Merck’s drugs, you want Pfizer’s drugs, you’re going to help pay off offset the costs. You’re not going to let us pay for it all. Then they’re going to pump up your country full of the same meds, and you’re just going to reverse patent and then sell it back to us.

Patti: It was interesting you gave an example again, when we were talking earlier about a cancer drug.

Dan: Gleevec.

Patti: Gleevec, that makes it much…

Dan: It cleans your white blood cells, so you can actually handle chemo.

Patti: The bad news with Gleevec in the United States is that it costs about $165,000.

Dan: Quote that, last time we checked.

Patti: A year.

Dan: Yeah.

Patti: However, if you go to…

Dan: Other countries, it’s going to be cheaper.

Patti: How much cheaper?

Dan: It could be about 5,000 bucks.

Patti: $5,000?

Dan: We’re paying the full freight for all the rest of the world.

Patti: It seems to me there’s a solution out there, right?

Dan: Again, [laughs] we have somebody in the White House currently that mentioned it and then it vanished. We’re not hearing it from any other politician. It’s alarming.

Patti: It is alarming. It is really alarming. Especially as baby boomers as we all continue to age, there’s going to be a lot of us who are going to be exposed to this issue.

Dan: That’s the biggest problem. When you look up baby boomers, there’s roughly 73 to 76 million baby boomers. When we look at our United States, the generation before the baby boomers is the greatest generation or the silent generation. There’s roughly 42 million of them.

There’s the ones collecting Social Security and Medicare and we’re being told that those programs are going broke. Now we have 73 to 76 million baby boomers heading towards retirement.

Patti: Almost doubled.

Dan: How many people in the greatest in the Generation X the next generation? Anybody want to take a stab? Not to put anybody on the spot.

Patti: Actually it’s higher.

Dan: No, it’s not. By birth, it’s less. It’s 62. Immigration is changing the number. What ends up happening is by birth, if you look at what we’re experiencing…BYU did a wonderful study on this, back in 2008, called “Demographic Winner.”

By 2028, 2029, United States for the first time in the history is the generation that’s heading towards retirement. The baby boomers are going to be larger than the generation following them. We’re putting all of this onus on the millennials, thinking that millennials are going to bill them out.

Though by birth, they’re not bigger, but by immigration, they’re bigger same with Generation X, so you’re correct. It just not by birth. The issue comes down to when you look at baby boomers when you adjust for inflation. When a baby boomer was 28, 29 years old, making exponentially higher wages.

Patti: Yeah, absolutely. These kids now, the millennials are underemployed. They’re not making the kind of income that…

Dan: They may be doing what they call them side hustlers, gig economy. I’m not going to knock the millennials for being lazy. I’ll knock the millennials for not being bright. I can do that all day long. I’ve got kids in the public school system. I’m sticking a flag in the hill.

Patti: There we go.

Dan: But they work. They’re Uber drivers, they’re Uber Eats. Might not be traditional jobs, but they’re working. They’re not earning enough. Now when you talk about the baby boomers heading towards retirement, there’s this medication bill.

Think of it, we are, you could say what you want about our US healthcare system. Anybody want to go toe to toe, it’s the best system in the world. Hands down, the best system in the world, you just going to be able to afford it.

Patti: No question about it. I did my study abroad program. When I was at Georgetown, in nursing, and we did our program in England, and I learned about socialized medicine. Let me tell you, folks, we have it really good.

We have it great, because we do have choice.

Dan: It’s not just choice, the grand scheme of things. We’re the ones, we foot the bill for all the new technology, all the new advancements, all the new medications. Then they go over to England, they go over to India, they go to Cuba. If it isn’t for us, there is no advancement.

Where does the world head when the baby boomers wake up and say, “Hey, wait a minute. I can’t afford this. I didn’t plan for this. No one told me this. I wasn’t expecting this.” What’s going to happen 2028, 2029, ‘30 especially in our healthcare field when there’s no more money?

Patti: Dan, there’s so much talk about social security running out of money…

Dan: That’s never going to happen.

Patti: Yet, there’s not nearly enough being talked about with Medicare, and it’s a really big issue.

Dan: It’s the biggest issue the nation’s is going to face.

Patti: No question about it. Let’s kind of pull this and really drill down to, what should our listeners do? Let’s talk strategy. Think forward. We talked about IRMAA, we talked about the fact that the cost of the Medicare is going to be income based.

Dan: Yes.

Patti: So?

Dan: First off, this is going to sound really weird coming from…We’re tech guys, that’s all we are…

Patti: Sure.

Dan: We are guys. It’s all men. If you want to join, we love to be… [laughs] This is going to sound really weird. The first two things that we tell everybody to do is walk barefoot for 20 minutes a day, go to the dentist every six months. That’s…

Patti: That’s good for your health.

Dan: The reason why the weakest part of your body is the bottom of your feet. Think of what you don’t work out is the bottom of your feet. When you have a slip and fall over the age of 73, 74 for no reason, like you’re just walking, have slip and fall. You have less than two years to live.

Actually, the reason is you get laid up in bed. What ends up happening is your leg muscles start to atrophy because the weakest part of your body is your feet.

Patti: That’s exactly right.

Dan: Now when you…

Patti: I’ve seen it.

Dan: Now you get healthy or you can come off of being bedridden. What ends up happening is all the muscles in your lower back and legs are pulling down your feet, you start walking over hunched, you can’t really step because your feet hurt.

They give you those thick shoes, soles, and they give you a walker. You can’t circulate the blood. You’re dead in two years.

With teeth, if you have cardiovascular disease, it shows up in your gums six months prior to a doctor actually being able to see it. So we went on a tangent. [laughs]

Patti: Fantastic. This is, listen, you…

Dan: That’s the first thing we tell people. [laughs]

Patti: Tune in for any advice you might be looking for. So great advice…

Dan: The next advice is we can’t encourage it enough. Yes, if you’re going to head towards retirement, they should be meeting with you 6 to 8 years, we’re going to argue because of the way the rules of retirement have changed.

It’s not 6 to 8… its do this 20, do this at 25. Do plans that are going to help you in the future. What we argue is very simply, you want to make sure the government doesn’t see all of your income.

Patti: When you say see, we’re not talking about hiding it?

Dan: No.

Patti: We’re looking at different ways and strategies to make it so that it’s not subject to their calculations.

Dan: Big, so you want to make sure it doesn’t show up. The key lines in this year’s tax code because of the tax cuts, is line 7 and 2A of the IRS Form 1040. Any income that doesn’t show up there, that’s a Roth IRA. That’s an HSA. That’s life insurance.

You want to have that heavy, we’re not saying don’t use tax deductible, you need that, you need a tax break. Again, it’s not all or nothing, you’re in either side. That’s the beauty of planning for this effectively.

If you’re going to wait two to three years and then go on to Medicare. Well, you can’t change your income, because Medicare again, looks at your income two to three years behind.

Patti: It is very interesting for younger people who might be listening to this maybe not even thinking for themselves, but for their parents. One of the things that we tell younger people is don’t do the pretax 401k contribution. You should be doing the Roth.

Dan: That’s the greatest advice you could possibly give.

Patti: Yes, it has and there’s lots of reasons…I believe, and Dan, you probably agree with this, tax free beats tax deferred every single time and while…If you run the numbers and you make certain assumptions, it could end up exactly the same.

We have this debate internally all the time. We are literally at generational lows in terms of taxes, tax brackets, things of that nature.

Dan: Yes, it’s going up, it has to only go up.

Patti: Our deficit is getting larger and larger, then we’ve got this looming issue out here with healthcare and so something’s got to give. Taxes, these surcharges, they may not call them taxes, but that’s what they are.

They’re taxes. If you are younger and are listening to this, really think long and hard about how you do your 401k contributions. Remember tax free beats tax deferred every single time, in my opinion, in most situations, again, unique differences, etc. It all comes down to the assumptions.

Dan: Now, to back you up, we don’t necessarily get in the debate and simple fact that we have what is known as federal law. When we speak for advisors to the general public or we sit on platforms like T. Rowe Price who’s sponsoring us today, they’re one of the only financial firms that are advocates of healthcare.

It’s an amazing thing, because here’s a quick question. I know there’s some other people in the room, the maestro, and we have them looking, we will ask them. “Which financial firms helping people plan for healthcare? Anybody know?” There isn’t one.

When you take a look at a firm like T. Rowe Price sticking their flag in, when you start looking at where we’re headed as a nation, as you mentioned, the federal government, the way they change the rules, the federal government has figured out a way how to pay down the deficit.

Patti: This is fascinating. Keep talking.

Dan: What we show people is, as you mentioned, the debt deficit, I believe it just broke the $22 trillion mark last week. There’s only coincidences with inside the beltway. When you go to Washington, DC with inside the beltway, the highway, it’s only coincidence. Nothing ever happens because of chance, because of fact, just coincidences.

It’s never factual. What is the amount of retirement assets that baby boomers control? $22 trillion, just a coincidence.

Patti: Wow.

Dan: When you take a look at what the federal government has done. How they change the rules is you have to have Medicare. T. Rowe Price took the peace, you have to have Medicare, you don’t have a choice, and you can’t get away from it.

The fact that you have to have it should be fine, and we argue it’s a great program. It’s not a bad program to have, it’s arguably the best. The bigger issue is, it’s got the IRMAA surcharges.

They define income is everything on line 7 in 2A. And then, what ends up happening is when your income is too high, it depletes your social security check. We talked a little bit about the Hold Harmless Act. Congress went ahead and they changed. It’s called the Medicare Freedom Act.

Yeah, it’s the Freedom Act. The only thing it addressed, the only thing, was Medicare’s IRMAA. What it states is, “Anybody who enters Medicare’s IRMAA is no longer afforded the protection of the Hold Harmless Act.”

So once you enter this, you can, if fact, see your Social Security deplete.

Patti: That’s why most of our clients do see their Social Security deplete.

Dan: Deplete. It all comes down to what you show to the government. The advice that you are giving, “Take advantage of Roth. Don’t show the government.” We’re not saying, as you pointed it out, and I’m not a financial professional. No licenses. We don’t sell anything. I’m a little ignorant…

Patti: Objectively.

Dan: I’m a little ignorant when I say, “Don’t show the government anything.” Doesn’t mean go see your Uncle Vinny and hide it.

I’m Italian. [laughs] Don’t see your Uncle Vinny and hide it under a mattress or put it in something strange. No, put it in a Roth.

Patti: Restructure your income.

Dan: Bingo.

Patti: Restructure. You need cash flow. Let’s always remember there’s a big difference between cash flow and income. What you need in retirement is cash flow. How do we create cash flow in the most tax efficient manner possible? How can we anticipate, maybe some of the things that may not even hit you right now, but we’ve got to really have a vision and understand where this thing is probably going.

Dan: What’s great is the federal government doesn’t hide anything on where this is going. They’re telling you exactly where this is going. Your social security check, for the most part, if you’re lucky is never ever, ever going to go up.

Patti: Well, that’s clear. Yes.

Dan: Now, if you’re unlucky your social security check is going negative.

Patti: Unlucky in this case are people who did a great job saving money. These are the people who worked, sacrificed and maxed out their 401ks and said, “I’m going to be a responsible American and build up my Nasdaq.”

Then you turn 70 and a half, and then you’re forced to take the money out and because of that, of course it’s taxed but it has a domino effect on everything else. Medicare being one, the deal with the surcharge, more of your social security gets taxed, etc.

Dan: Then you’re taxed on social security benefits.

Patti: I will say a real sidebar thing, folks, if you are listening to this and you’re in your 60’s, to me, your 60’s provide the greatest tax planning opportunity that you’re ever going to have. Because for most people, your tax bracket, once you stop working, goes down.

If we are concerned about what happens at your 70 and a half, why not start receiving some of that income? Maybe we’ll take you up to the tippy top of the 12% tax bracket or even the 25% tax bracket. But right now, it’s not affecting Medicare.

Dan: That’s a great idea.

Patti: We’re getting the money out of that environment, which basically will reduce the amount that you are forced to take out when you turn 70 and a half. Therefore, that additional surcharge or that tax on Medicare will be lessened or maybe if we’re smart, you won’t have to pay it at all.

Dan: That’s genius.

Patti: How about it? Right? That’s why taking a holistic approach to all of these issues as it relates to each individual figuring out… and everybody’s going to be different.

You might retire when you’re 62. Somebody else might retire when they’re 64. You might have two incomes coming in. During the working life, you might have had only one. Every situation is very different.

What we do know is, what are the rules now? Where are you likely headed? What can we do today to optimize?

Dan: Fantastic!

Patti: I’m all about optimization, Dan. Knowing you and knowing this information just makes us better.

Dan: Thank You.

Patti: I’m so grateful for the information that you’ve given us today. Strategies, number one, talk to somebody. Long before you ever think you’re going to need to be thinking about this. That’s number one. Whether it be a financial professional, or you go online.

You go on medicare.gov. You begin to understand what the rules are. In our area, basically the Pennsylvania Department of Aging has something called APPRISE. You can call APPRISE and sit down for free with a counselor.

For those of you who are listening, the 800 number is 1 800 783 7067. Again, it’s 800 783 7067. In our area, which is Chester County, there are eight different locations where you can sit down with an APPRISE counselor and go over your personal situation.

They will give you the different choices. They will talk about Original Medicare and then Medicare Advantage. They’ll talk about A through L or whatever the different plans are and really help you to figure out what’s right for you.

Always keep in mind we’re here too. If you have any questions please feel free to go to our website. That’s keyfinancialinc.com, write in your questions. Give us a call, our phone number, (610) 429 9050. We’re here to help. We really want to make sure that our clients, people in our area, are not going bankrupt for something that was completely avoidable. Just make the right choices. Right?

Dan: Or get the right advice.

Patti: Get the right advice. Dan McGrath, I can’t tell you how much I appreciate you. Making the trip, I appreciate all of the information. We were talking offline folks, we could do this for an entire day. It’s amazing, all the little nuances, etc. I will tell you that we will be talking about this whole day with Dan. Again, any questions feel free to give us a call.

Also keep in mind Dan has written not one book but two books. The first one is “Everything You Need to Know about Medicare.” The second book, “What You Don’t Know about Retirement Will Hurt You!” What he’s done in this book is he’s integrated this discussion of the cost of healthcare as it relates to your income and your retirement financial security.

Pick up Dan McGrath’s book, listen to this podcast. We will be doing another podcast even after this. Folks thanks so much for joining us. It’s been terrific and I hope you have a terrific day.

Dan: Thank you very much Patti.

Ep29: It’s Open Enrollment – Which Medicare Plan to Choose?

About This Episode

Medicare open enrollment ends December 7, 2019. Patti discusses the pros and cons of each Medicare Plan option with Dan McGrath – one of the nation’s leading experts regarding health-related costs and Medicare. They discuss which plans are the best and which to avoid, but most importantly, the best time to enroll for the best cost savings. This episode is the first of a 3-part series that offers critical information not to be missed!


Patti Brennan: Hi, everybody. Welcome back. Welcome to “The Patti Brennan Show.” Whether you have $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today, with me, I have the real pleasure of introducing Dan McGrath. Dan is considered to be one of the country’s leading experts on the subject of health-related costs and how they affect retirement and your overall financial plan. His expertise is specifically related to Medicare and the different plans that are available.

I thought this would be a really good topic for us to talk about today because as we all know, it’s open enrollment right now for Medicare, Dan, right?

Dan McGrath: Yes, it is, Patty.

Patti: What are the dates? First of all, thank you so much for joining us.

Dan: My pleasure for being here. Thank you for allowing us to get us. Nice to see somebody in the financial industry paying attention to such a – I will argue – very important topic.

Patti: It’s really a big issue for all of our clients and all Americans. It’s not an area that a lot of advisors really spent a lot of time digging down and understanding.

Dan: Is we’ll go further on in the conversation, you’re going to find out exactly how important it is to the country. We’re seemed to not be paying attention to the real underlying issue we have, which we’ll discuss properly further.

Patti: Boy, wait until you hear, folks, some of the things that are going to bubble up in today’s conversation. Let’s talk fundamentals first. We’ve got open enrollment now started out October…

Dan: 15th.

Patti: …right, and it goes until?

Dan: 1st week of December, usually December 7th. Just comes down if it falls on a weekend. I didn’t look at the calendar.

Patti: Dan, you flew into Philadelphia.

Dan: Drove.

Patti: You drove into Philadelphia.

Dan: Five and a half hours.

Patti: Five and a half hours from Massachusetts. What a privilege it is for us to have you here with us today. Thank you so much. Let’s talk just on a big-picture basis fundamentals, Medicare A, B, Medigap advantage. Can you go over those and give our listeners a feel for the differences in the tip and the choices they have?

Dan: We’re tying about the exciting world of Medicare. People have to realize that there are two types. You have what is known as Original Medicare and you have what is known as Plan C or Proxy. Medicare is known as the alphabet of coverage.

What the alphabet is Medicare Part A, that covers hospitalization. That covers you going into a hospital as long as you’re admitted as an in-patient. For medically necessary need, if you have Part A you’re completely covered. Everything is covered. That’s the beauty of Medicare. That’s Part A.

Patti: OK. Can I just stop you right there?

Dan: Sure.

Patti: Everything is covered, but what about these people who are having to declare bankruptcy because…

Dan: They’ve not properly planned. There’s a lot of issues.

When you start taking a look at Medicare, the first thing people have to realize, depending on what you choose, so I’m now putting on the two sides, original Medicare or Plan C, so I’m going to put on the original Medicare side add on.

When you have original Medicare, which is Part A, Part B, a stand alone prescription drug plan, which is Part D, and a Medigap plan, which is usually Medigap Plan F, which is the most robust, but you can get it through A through N.

A being the cheapest. N the least protective, but it’s still something.

F being the best, but they’ve shut that down. It’s now just Plan G.

If you have original Medicare, here’s the key. You have to be admitted as an in-patient for a medically necessary need. If you are not, you’re not covered.

The example that we like to give with my firm, Jester Financial Technologies, is we’ve all heard the story of, we’ll say it’s Jane. Jane retires at the age of 67.

She’s dead by the age of 69. Everyone says, “Well, the reason she died is because she wasn’t connected to work, or retirement is not fun. It’s boring.”

That’s the giant lie. Who doesn’t want to be retired? Who doesn’t want to do what they want to do when they want to do it?

Patti: Yeah, exactly.

Dan: Who wants to deal with the seven-hour commute, especially in this area, over the bridges? What ends up happening is Jane retires.

She was on health insurance through her former employer. Not saying it’s good or bad or indifferent, but they cover different things.

Prior to going into the hospital and prior going to retirement, Jane goes to the hospital, gets to physical. They do all the blood work. They do the EKG’s.

They do all this, and everything’s covered. She gets a deductible through her employer. Everything’s covered.

She pays a deductible. She goes along her way.

Well now, she’s retired. She’s 67, 68 years old. She has a flutter in her heart.

She doesn’t know what’s going on. She goes to the hospital. Because of current legislation, the hospital has a choice.

They’re either going to put her under observation, or they’re going to make her as an in-patient or admit her as an in-patient for medically necessary need.

They don’t see any outward problems, so they have to bring her in under observation. They run a bastion of tests.

They don’t find anything wrong with Jane.

Patti: Are you saying that that is not covered?

Dan: None of it. Medicare doesn’t kick in. She pays for it all. Pays for all the tests. Now, the problem gets further. It’s further compounded. We had this thing called the Affordable Care Act. What that did, is it paved the way for Medicare to change the inpatient rules.

If you get admitted into a hospital as an observed observation on observation, in order for you to get admitted as an inpatient, you have to spend two midnights inside the hospital. How much is a hospital room?

Patti: It’s going to be four or five hundred dollars a night. Easy.

Dan: No. Try four or five thousand dollars a night.

Patti: Right, if you add all the tests and everything?

Dan: No. Just the room.

Patti: Wow.

Dan: Just the room. There’s a reason for that when you start looking at healthcare and you start looking at why cost increase. It’s mainly due to Medicare, believe it or not. We talked a little bit off the air about a pew study about how Medicare spending has gone down or hasn’t increased.

That’s not a good thing. That’s a very, very, very bad thing. What ends up happening is, they get admitted into the hospital, not as an inpatient but under observation. In order to switch over, they have to do two midnights. After two midnights, if they still don’t find anything wrong with her and they can’t admit her as an inpatient, she’s going to pay the whole bill.

Patti: A lot of Americans don’t realize that as I didn’t. It’s funny because we are so focused on the deductibles, the co pays, and things of that nature. You’ve got to make sure that it’s going to be covered in the first place.

Dan: When you hear about the hospital insurance denying a claim, it’s not necessarily denying claim. I’m not saying that insurance companies are the saviors. They’re huge problem as well, because now I’m going to put on the other hat, I’m going to put on the Medicare Advantage or Part C.

Those are private insurance companies that are ministering private insurance plans under the guidance of the centers for Medicare and Medicaid services. They may just deny a claim. The biggest problem you’re seeing when people have these high out of pocket, is if they’re on Medicare Advantage, different hat.

The problem when you read the fine print on all of these plans, not many, not a few, all of the plans. If you’re not improving, or you’re not progressing, or regressing, you’re not covered.

Patti: What a bizarre way of framing things? Insurance is supposed to cover you. It’s crazy.

Dan: They cover so you go in. Think of it. You get admitted as an inpatient under Medicare Advantage. There is an issue, you get stabilized. Once you’re stabilized, now it comes down to, “Can they discharge you immediately?”

If they can’t discharge you immediately because the attending physician doesn’t feel it’s safe, it’s not adequate, whatever it may be…

Patti: You know what, Dan? I don’t know if you realize this. I used to be a nurse. There were people who would be stable for 12 hours, and then they would crash again. They’re going to crash at home?

Dan: It may not be that short of a time frame. You as being a nurse, how many people because you’d have made a mention because you did God’s work, you did oncology.

Patti: Yes. Absolutely, yes.

Dan: It’s God’s work.

Patti: Thank you.

Dan: How many people slip into comas?

Patti: That happens an awful lot. It could be a hormonal response, etc. They’re in a coma, and then they come back out again.

Dan: Once they go in, they’re not progressing, or they’re not regressing, they’re in a coma so take a stab it with they’re not going to cover. That’s where you start seeing all these bills rack up. It’s all because people don’t read the fine print.

You take your Medicare Advantage hat off, and you go to original Medicare which is a little bit more costly, and believe it or not, there is less coverage. If you have a Medigap supplemental policy, you can stay in the hospital for 365 days.

Patti: It’s covered?

Dan: It’s covered fully, but it’s more expensive than Medicare Advantage plans. Now you’re dealing with, “What can you really afford?” and you have to actually think about, “What is my health history for my family? What is my longevity? What am I doing health-wise later on in life?”

Patti: It’s really interesting when I think about an insurance, and I explain insurance to clients. It’s a risk transfer tool. Either you assume the risk of that coma, and being stable in that coma, and are willing to take the risk that you’re going to have to pay for that care while that’s happening, or you transfer it to an insurance company.

If that ever happened, let them deal with it. Let them pay for it.

Dan: To just solidify your point, the one thing that people have to realize about healthcare, there is no getting away from it. Unless, of course, you go ride off into the sunset. You’re on a boat. It sinks. You drowned. I’m sorry. Even if you’re in the street and you have a massive heart attack, they’re still bringing you to the hospital. They’re still going to run a bastion of tests.

They’re still going to try to revive you. You’re still going to have a bill. You may be passed away. Your loved ones are going to have that bill. Everyone is going with this bill. What do you do? Do you accept the risk, or do you transfer it as you said?

Patti: Let’s go back to the beginning.

Dan: [laughs]

Patti: It’s so interesting because every time I talk with Dan, we always get into these…

Dan: Tensions.

Patti: …nuances and these things. It’s important that people are aware of this. We’ve got Part A, Part B.

Dan: You’re talking now original Medicare.

Patti: Right.

Dan: Under original Medicare you have Medicare Part A, which covers hospitalization. That is premium fee. You pay through that through payroll taxes your whole life as long as you qualify. It’s 10 years, 36 – whatever the qualification of Social Security. Once you retire and go onto Medicare, that’s premium free.

There are co pays and the deductibles with Medicare Part A, which are covered by supplemental plans. Then, in order to cover physician visits, that’s Part B. That unfortunately has a premium. The premium in 2019 was 135.50. It should be going up by about six to seven percent. Should be at 144. We at Jester, what we do is we show people or project what the costs are going to be.

We are not currently confident with what’s happening. As you had mentioned, open enrollment started October 15th. We still don’t know what Part B is going to cost.

Patti: Isn’t that interesting? Here our government is forcing people to sign up.

Dan: Sign up.

Patti: We don’t even know what the cost is going to be.

Dan: Nice how that you said they’re forcing you, believe it or not. One part that we always want to make sure everybody knows, this Medicare, whichever side of the fence you sit on, is mandatory. You can’t get away from it. You forfeit your Social Security check. You don’t have a choice. On top of that, the Affordable Care Act states that you have to have it.

It’s wonderful. I know T. Rowe Price is here. They’re helping us plug. They’ve given a hand out on that. They stole our four rules of retirement. When you take a look at what’s really going on when you talk about they still haven’t released the money or they still haven’t released the premiums, supplemental coverage has already come out.

Patti: You know at least with the supplemental.

Dan: Here’s the problem. Supplemental coverage is coming out. They pay for the deductible of Part B, but we don’t know what that deductible is.

Patti: The insurance companies that are the Medigap policies are taking on the…

Dan: They’re taking a huge risk.

Patti: …risk. Right.

Dan: This happened before in 2016. This is what scares us. There was a reason specifically why it happened in 2016. From 2015 to 2016, Medicare Part B was supposed to inflate by 52 percent.

Patti: Wow.

Dan: There’s a reason why it physically can’t. We present. We explain a certain state, the state of California, filed for insolvency because of it. With that increase, the deductibles were supposed to also go up by not 52 percent. They were going to go up by 20, 30 percent. The Medicare supplemental companies have already came out with their premiums. They would have taken a bath.

Now the reason why we talk about Medicare Part B premiums can increase, the little dark secret that nobody wants to talk about. This is the country’s biggest problem. No matter what anybody wants to talk about, this is it. The public employees that work in the state of Pennsylvania that work in the city of Philadelphia, when they retire and turn 65, what health insurance do they go on?

Patti: Well, they’d have to go on Medicare, also. Right?

Dan: You’re 100 percent correct. Here’s the bigger problem – depending on their tier structure. We can speak for New York because we’ve consulted. New York has a tier structure. If you were working for the state or a city in New York state 40, 50, 60 years ago, you’re tier one. When you turn 65, everything’s covered. They take care of your Medicare Part B.

They take care of your prescription drug coverage. They even buy you a gap plan. Now, it whittles down with the tier structure where unfortunately the newer people coming on are not getting such a robust contract. They may not be getting any coverage at all. You have a problem with these Baby Boomers. There’s roughly 76 million of them that are all heading towards retirement.

All these state governments have to pick up their premiums.

Patti: That’s why the state of California…

Dan: Bingo.

Patti: …sued.

Dan: They didn’t sue. They just basically told Department of Health and Human Services, “We cannot physically pay for this.” If you look at the state of New Jersey in 2017, now granted this is from their retirement department. All we can do is just get raw data. They’re not going to tell us specifically who’s retired. They just give a list of people that are retired.

We don’t know if they’re getting health benefits. We don’t know if they’re even still collecting a pension. They just provide the data of all the public employees. There are 373,000.

Patti: That’s a lot of people.

Dan: Part B premiums go up by 52 percent. The state of New Jersey cannot physically afford that. As you made a mention, the federal government hasn’t even released any of this. They’re mandating you have to sign up.

Patti: Wow. It’s a real conundrum that people have in terms of making their choices and etc.

Dan: It’s worse than actually graduating high school.

Patti: [laughs] Tell me about how you’re making that comparison.

Dan: [laughs] When you’re in high school, remember your guidance counselor, your parents, your teachers. Everyone’s are all over you. “What do you want to do with your life?” You’re 18. Now, you’re turning we’ll say 65, the golden age of retiring and going on Medicare. You literally only have two choices – original Medicare or Medicare Advantage.

Depending on your state, and there’s only eight states where you have an option. Pennsylvania not being one of them, my state New Hampshire not being one of them, or our offices in Massachusetts not being one of them. If you don’t choose original Medicare, you may never be able to get it.

Patti: That’s the scariest thing about all of this. We tell all of our clients three months before they turn 65, “OK. Get ready. Time to sign up because, if you don’t sign up, you could be SOL.”

Dan: It’s not just SOL. What happens is when we still finish up original Medicare. You have Medicare Part A/Part B. Then you have your own prescription drug plan, which you’re paying through your Social Security check, or you’re writing a check each month. Then you buy what is known as a supplemental plan to cover the gaps of original Medicare Part A/Part B.

That’s the package for original Medicare. When you retire, once you accept Medicare Part B which covers doctor visits, you have a six month guaranteed issue to get on any Medigap plan you want without being underwritten. You are getting the premium. Whatever that firm charges, that’s what you’re getting. You cannot be denied. After the sixth month, they can rate you. They can deny you.

Patti: That’s interesting. One, OK, let’s play devil’s advocate. Let’s say somebody missed the deadline, and they are going with one of these companies. They understand they’re going to be rated, etc. Once they have it…

Dan: They’re in.

Patti: …they’re in. They can’t change it.

Dan: They can raise the prices, but they can’t kick you off.

Patti: Got it, OK.

Dan: That’s the beauty of a supplemental plan. Once you’re in, you’re in, but you have to get in. The example that we give, if you go with Medicare Advantage plans, which have advantages. Medicare Advantage plans, they can give more coverage. They can give you like dental, they can give you vision, they can give you podiatry.

Where Medicare won’t give you those types of coverage, Original Medicare, you can go on a Medicare Advantage plan. Medicare Advantage plans are also subsidized by Medicare, so their premiums can be premium free. You can sign up for Medicare, go on a Medicare Advantage plan and you pay nothing out of pocket, other than the Part B premium.

Patti: Let me play devil’s advocate. This may sound crazy, but let’s say you have somebody who was really risk-averse and they just want to know they’re covered for everything, hearing aids, eyes, the whole bit. Can you get Medicare Advantage and…?

Dan: It’s illegal to sell. Can’t do it.

Patti: Darn. OK, oh well.

Dan: We go back to State and public employees. For those that are entering near retirement that are public employees who think they’re all set, they are. You also want to meet with someone like you, a finance professional that’s engaged in this, for the fact that they might actually, believe it or not – because they are the only ones that can do it, with exception of Members of Congress – they might be fully insured.

They might be able to get original Medicare and the State might be picking up an Advantage plan or vice versa. They could be fully insured, they need to sit down. We will argue it’s not three months you want to sit down with you, five, seven, eight years prior and setup a plan to know what’s going on.

Patti: I think that to your point the five, seven, eight years ahead of time, the plan has to do with, what are the overall cost for you, and it’s based on your income. Right?

Dan: That’s the other part of Medicare, it’s when you start talking about how Medicare funds itself. Congress created what is known as the Income Related Monthly Adjustment Amount, better known as IRMAA.

All that is very simply, when you go onto Medicare, by law, Medicare has to contact the IRS to find out how much money you are generating.

If your income is over a certain threshold, you’re going to get a surcharge on top of your Medicare Part B or Part D premiums. That surcharge can be anywhere between 40 240 percent of the current year’s premiums, Part B and Part D premiums.

Patti: 240 percent higher?

Dan: Yes.

Patti: Talk about a success tax.

Dan: [laughs] It’s worse than that. What we show people is, especially for people that have earned a lot of money, that haven’t spoken to you about distribution…Let’s say they have a stay at home spouse. You’re going to collect your Social Security check, even though they may or may not need it, they’re going to collect their Social Security check.

This 240 percent surcharge comes directly out of their Social Security check. Here’s the biggest problem. Their stay at home spouse, who’s getting half of their Social Security check, is still getting 100 percent of their Medicare’s IRMAA. What happens to their Social Security check?

Patti: It also goes down.

Dan: It actually goes negative. What we’re finding is retirees are actually having to write a check to cover what their Social Security check doesn’t cover for the Medicare premiums.

Patti: Yes, we have seen that. Absolutely.

Dan: You got to plan for that a little bit. It’s all about knowing what your income is going to be in retirement.

Patti: It’s interesting because initially, when someone turns 65, 66, the costs of the different plans, etc., when you roll it all together may not seem as intimidating. To your point, in Pennsylvania the costs are age-related. They’re age-based.

We are not one of those states that’s community-based. Why don’t you explain that for our listeners? That’s a really big deal.

Dan: We’ll use Pennsylvania versus New York. When you turn, let’s say, 65 years old, you go onto a regional Medicare. You want what is known as a supplemental plan. You can’t buy Plan F. It’s now Plan G. Plan G is now the most robust, meaning you get full coverage, with the exception of paying a deductible, which we don’t know what the deductible is.

Patti: Right.

Dan: [laughs]

Patti: How about it?

Dan: It was $187. We don’t know what it is yet. Hopefully it stays at $187. That premium at the age of 65, on average for the state, it’s a $195 a month. It can be cheaper depending on the insurance provider that you go to. It can be as low as I believe 168. It can be as high as 235.

Patti: OK. Let me just stop you there. Here’s a question, in all of the insurance companies the benefits have to be exactly the same?

Dan: On supplemental plans, yes.

Patti: One company can be a well known company, etc. They might cover whatever it is that you might need covered versus Company B, they’re going to deny it. That cannot…

Dan: Cannot happen on supplemental plans. Supplemental plans, they all have to offer, no matter who you go to, no matter what state you go to, with the exception of Massachusetts and Wisconsin. They have to provide the exact same benefits. No matter what the plan.

Plan A, I’m just making up names, Plan A for Humana, Pennsylvania is going to be identical to AARP’s Plan A. It just comes down to what is AARP want to charge this year or this month versus what Humana wants to charge.

Patti: Let’s go to a third company that you may never have heard of before.

Dan: American National.

Patti: American National, not a common household name, etc. They may be cheaper. What is the risk that we’re taking
by going with a company that might be…?

Dan: Here’s the biggest risk. The biggest risk is in the state of Pennsylvania, what you are looking at is age. Each year, depending on the contract you buy, you can buy a Medigap policy and say, “I’m walking into the next five years,” or “I’m walking into the next two…I’m going to roll the dice. I’m going to play it year by year.”

The insurance company may not even give you that option. That lesser known company may not give you that option. The next year you buy it for, let’s say, the cheapest 168, in the state of Pennsylvania. The next year they may jack up the Medicare prices by 27, 28 percent.

Patti: You look at that, you say, “I don’t want to be with this company anymore.” What happens? You have to go to someone else?

Dan: You have to jump to another Medicare supplemental company but now, you have to go through medical underwriting and if you’re not healthy…

Patti: Boy, that’s a really big deal.

Dan: This is where, again, expertise in, we know you’re not on the health side. The reason why we encourage the general public to speak to you before speaking to a health professional that’s going to sell these plans. Their job is to sell a plan.

Your job is to make sure the Retirement plan can meet or can incur all the costs within side the plan. You are the one that’s going to gauge, can you afford to do X, Y, Z? It’s more important to speak to you and members of your team than it is just to speak to a healthcare professional.

Patti: Yeah. We don’t want to have someone who’s 72 years old having being on Medicare and with the same Medigap policy and all of a sudden something like that happens, the premium skyrockets. They’ve got to go to a different company and they’re uninsurable. The companies are going to really hit them hard.

Dan: The state of Florida, state-wide, the Gap plans increase by 26 percent over the board. Not every plan did that. Some plans inflated by as much as 80 to 90 percent.

This is not in any way an endorsement to Humana and AARP. The well-known names within side that world, prices are going up. We’re not saying the prices are not going up…

Patti: But they can spread the risk.

Dan: You’re never going to see a double digit increase.

Patti: Very interesting.

Dan: This is why we’re excited, why we drove down here to be on the show. People need to know what’s going on. You’re one of the only financial professionals in the area that’s engaged in this conversation.

Patti: I just think it’s so important because it’s such a big part of a retiree’s costs. It’s interesting, as you know Dan, I’m on the MIT Longevity Council. It’s a board of advisors from all over the country. I think there’s 12 of us.

It was interesting because Dr. Joe showed us that the cost per medical-related care when someone retires, say at age 65, is actually not the biggest costs. Housing and auto costs are actually more expensive than medical costs.

Dan: Yes.

Patti: To your point, as we age it begins to escalate and escalate and really does become the biggest part of a person’s budget, the cost per Medicare, A, B, D…

Dan: This is another reason why speaking to you becomes important. Medicare, no matter how we want to look at it, if we look at original Medicare, it’s inflating. The federal government tells us it’s going to inflate at a rate, no lower than about 6 percent, 5.87 percent. They tell us that.

We know what Medicare is going to inflate at, and we know what the costs are today. You can plan for that. The problem is, somebody that goes the other route, to Medicare Advantage, now you’ve basically unlocked Pandora’s box on what the cost can be, because they can deny coverage, you’re in a network, you may not get the coverage in the right spot.

You may have a medical emergency, you’ve get transferred to one hospital that’s not part of the network.

Those are the risks that people…What’s great about this conversation that we’re having here is, hopefully listeners understand, we’re not knocking Medicare Advantage plans. Everything has a place. If you can afford, if your financial plan dictates you can afford original Medicare, and you understand the rules of Medicare, that’s the road you go.

Because you know what the costs are going to be, you know how to maneuver, or use the system, there are no surprises.

Patti: That’s awesome. That’s so interesting and so important for everyone listening to know. Now, let’s wrap this up. Folks, if you’re listening to this broadcast, just know that we’re going to do a second broadcast to talk about strategies.

Let’s summarize what we’ve learnt so far. Number one, there are different types. There’s original Medicare, and then there’s Medicare Advantage.

Dan: Spot on.

Patti: Basically, Dan, why don’t you summarize original Medicare versus Advantage for everybody?

Dan: Original Medicare is basically Medicare for All. One by the centers for Medicare, for Medicaid services. You have standalone plans, you’re going to make your own premium payments, but you’re going to be fully insured. You’re not going to have anything come out of your pocket. As long as you get admitted as an in-patient to a hospital for a medically necessary need.

On the other side of the equation, Part C, Medicare Advantage plans, they’re run by private insurance companies, overseen by centers for Medicare, Medicaid services. They are going to be cheaper, but unfortunately, there’s networks and there’s hurdles that you’re going to have to jump over. They’re both necessary, and it all comes down to your budget.

If you can afford original Medicare with the Medigap plan, that’s the road you go. No questions asked.

Patti: Dan McGrath, this has been an eye opening, ear opening, everything opening podcast. Thank you so much for your time today. We certainly had the expert on Medicare and the different types of plans. I’m so grateful for your time.

To all of you listening, feel free to visit the website at www.keyfinancialinc.com. Send us your questions, feel free to give us a call if you have questions. We will be happy to refer you to people in our area who can help you with these questions. We will help you with these questions and guide you accordingly. Until next time, thank you so much, and I hope you have a wonderful day.

Dan: Thank you, Patti. Thank you for having me on the show.

Patti: You bet.

Ep28: Leadership in Conflict Management

About This Episode

In the last episode in our trilogy of Leadership episodes, Patti continues her conversation with Mike Buckley, retired CEO of Pennsylvania Hospital. The two discuss how effective leaders manage conflict within their teams – how trust is built, credibility is established and ultimately how conflict is resolved. No matter how large or how small your organization is, problems will arise that need resolution…learn how to “be soft on the people, but hard on the problem” and see how swiftly the situation is remedied.


Patti Brennan: Hi everybody. Welcome back to the Patti Brennan Show. Whether you have 20 dollars or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is Michael Buckley. Michael is a former CEO of Pennsylvania Hospital. He started his career as an infectious disease specialist and worked his way up and was invited to be the CEO of the hospital.

Mike, I just have to ask you, you were a regular doctor. How did that happen?

Mike Buckley: Well, it happened very slowly over time. I was at the hospital for 32 years before I was asked to take on the CEO job. It didn’t happen overnight.

I took on a number of leadership positions over time, starting out, as you said, as just concentrating on being a good physician. I loved being a physician. I never stopped loving being a physician. I never stopped being a physician despite all the leadership positions.

I think the first thing I did was establish my clinical credentials and credibility over time. I think when you do that, and people trust your clinical judgment, they begin to trust your judgment in other areas that might affect them.

Over time, I was asked to take on leadership positions. Some were small, some were larger. I was the associate dean when the merger happened between the University of Pennsylvania Hospital at 34th and Spruce, and our hospital, which is the Pennsylvania Hospital, at 8th and Spruce. The hospital founded by Benjamin Franklin and Thomas Bond, a 500 bed teaching hospital, but much smaller than the hospital of the University of Pennsylvania.

When we merged in 1997, I was asked to take on a role to try and make the merger work. After that, I became Chairman of the Department of Medicine, and Chief Medical Officer. Then in 2010, I was asked to be the chief executive of the hospital.

Patti: Wow. I think back to that merger, and I think back to integrating Pennsylvania Hospital into the big Penn system, and this concept of conflict management, where people are concerned about their careers, and what this means for them.

That skillset of being able to manage the people, and to understand their priorities, their issues, and to make this all work. Your ability to do that, you were so successful in making that merger possible.

Mike: I think that in order to manage conflict, or manage all of these issues, one of the first things that needs to happen is that people need to trust you. People need to trust that you’re going to be honest with them, that you have their best interest in mind, and that when you say something, it’s the truth. That you’re empathetic, that you care.

All of those things are important in good leaders. Without those things, conflict management becomes almost impossible.

Patti: You have to establish your own credibility first?

Mike: Yes.

Patti: It’s interesting because given your role at Pennsylvania Hospital, you had the trust and the credibility with those physicians. How did you get it on the other side?

Mike: Well, fortunately, since I trained at the University of Pennsylvania, I knew a lot of people there who had known me for years. I had several very good friends that were in senior leadership positions there. I think the reason I was asked to do this in the first place was because they knew me.

They knew me as a physician, and they knew me as a person. That was very helpful that I had both 20 years at Pennsylvania Hospital before any of this but also had credibility “up the street” as we say.

Patti: It’s interesting because I think about the things that are necessary to even begin that process. It’s important to know thyself, right?

Mike: Absolutely.

Patti: …to really understand how you might be coming across and what the other party is looking to accomplish, right?

Mike: Correct.

Patti: This concept of emotional intelligence is sometimes underrated, isn’t it?

Mike: I agree. I think it is. People who have a high emotional intelligence quotient, so to speak, are very self aware. They know who they are, they know what they do and don’t like and particularly about conflict, how they behave. Do they run away from it? Do they like to fight? What are their pros and cons? What are their weaknesses and strengths? They’re also able to manage those things. There’s self management to that as well.

In addition to that, they have a social awareness, they know what’s going on around them, and they have social skills with people. They can develop relationships. They’re not aloof. People know who they are. People with that kind of emotional intelligence have an easier time of it.

I would just say no one, at least no one that I know, likes conflict management. They’d rather that there wasn’t any, but if you avoid it, it eventually gets you into all kinds of trouble, and things don’t work.

Patti: It gets worse over time, right?

Mike: Absolutely.

Patti: …if you just don’t deal with it.

Mike: Small things become big things if you let them fester.

Patti: Very interesting. When you think about different personalities, different people approach this differently. When you were doing this and when you were dealing with someone where there are different personality traits, did you change yourself to deal with the person that you were working with? How does that work?

Mike: It’s very hard to change yourself. You have a personality. You do what you do. What you have to do, is you have to separate the people from the problem. You can’t be thinking it’s this person. It’s what’s the problem this person’s coming at you with? What’s the conflict? Why is there conflict?

Very reasonable people have very different thoughts about the same thing. It’s the way things are. Conflict is going to be natural in those situations and so the issue is separating that. The mistake people make is they become very hard on the people and hard on the problem. What you need to be is soft on the people and hard on the problem.

Go at the problem but not the person and figure out why they got there. What brought them to this position that they’re in? One of the problems is, is that positions are conclusions. “This is what I want,” or “This is what I have,” or whatever it is.

What you have to get to is, “What’s the interest that they want satisfied by taking this position?” How do you get at the interest and understand that?

Patti: Right, so what is the motivation? What’s the endgame. What does it do for that person or that department? Once you understand that, then you can come together with possible solutions.

Mike: You need to figure out where your shared interests are and there almost always are. If it’s for the good of the company…In medicine, it’s for the good of the patient or for the good of the department, or whatever it happens to be, or for the good of the hospital. What is it and how can you get there?

Resources are scarce and everyone’s after the same small piece of the pie. The issue is, how do you deal with that?

Patti: It’s interesting because this came about because you were invited to participate in a leadership conference, and I thought that that was really interesting. I found your PowerPoint fascinating. One bullet point was, “It’s usually about money.”

Mike: Yes, and certainly – I don’t know in every business, although my guess is it’s true – in the hospital world and the healthcare world, resources are scarce. Hospitals are working hard to make some profit margin. Some don’t.

Some have a slight amount and there’s never enough money for all the capital projects you’d like and all the physician things that they want, or nursing, or whatever it is you’re trying to do. Because of that, you have to be very careful about making sure you do the right thing ultimately for the patients and how do you spend limited resources wisely? That’s often where these things come up.

Patti: You talk about the tools, 10 tools that can be applied to manage this conflict. To your point we were talking about this earlier – is there always resolution? Is it conflict resolution or is it managing it to get to a particular point?

Mike: You’d like to think it’s always resolved but it isn’t always resolved so that everybody’s happy. There’s this joke that if everyone’s a little unhappy, it was probably a good solution. I’m not sure about that but I do think that managing it is the way to think about it as opposed to making sure you resolve every single conflict.

You try to get to “yes” and, by the way, a lot of these tools come from that book, “Getting to Yes.” It’s important to understand that this is a process and that you have to understand some tools you can use when things get at an impasse.

Patti: I read that book, Getting to Yes, also. The author is Roger Fisher. Is that the same book?

Mike: Yes.

Patti: It’s a great book. You don’t realize that it’s really about conflict management. You think it’s more of a sales book which, in a way, is kind of conflict management because you’re trying to persuade someone to do something that maybe they don’t want to do. I thought that was a terrific book as well. The first thing that you start out with is, know yourself.

Mike: You have to understand how you are with conflict. Do I avoid it? Do I like it? Do I like fighting? What am I going to get out of it? Do I feel good at the end? Do I not feel good at the end? Have I sacrificed my own personal feelings for it? Have I sacrificed somebody else’s feelings? What about the relationship?

There’re different kinds of conflict management but, in the workplace, you are trying to maintain the relationships because you have to work with these people for a long time.

Patti: Oh yeah.

Mike: The joke that people always talk about is the car salesman and trying to deal with where you want to get to in terms of buying a car. Well, you don’t necessarily have to keep a relationship with that person, you don’t work with that person. You’re trying to come to a deal.

When you’re talking about people you work with, either you work for, or work for you, or work with, it’s important to maintain those relationships. So, the way you go about this is extremely important.

Patti: I think that it also would be important as it relates to future conflicts, because if they know you’re a fair guy. They know you’re a woman who is reasonable, who’s got the listening skills, and really try to understand both sides, then it’s much more likely that a future disagreement or a conflict is going to be resolved in a favorable manner for both parties because you already have that history together.

Mike: That’s right.

Patti: I thought that going through some of these tools…I love this one…the one thing about WAIT, to stop waiting to speak and start actually listening. There’s a very big difference between the two, isn’t there?

Mike: There is. In fact, one of the other things that Penn does in terms of helping to train physician leaders is when you take a major leadership position at Penn you often are asked if you would accept a coach and everybody generally does.

It was a very useful thing for me. One of the things I learned early on was that I often spoke up too early in a meeting. When I did speak up, it stopped the rest of the conversation because people thought I was speaking authoritatively and that was it. This is my opinion so that’s it.

One of the things I learned was really not sitting there waiting for someone to finish what they were say so I could get my idea out but actually listening to the person and not speaking and the WAIT is, “Why am I talking?” Making sure that you sit back, either talk last or really wait.

What people fail to understand is that real active listening is actually an act of empathy because you’re giving the person the understanding that you care what they’re saying. You care what their view about this particular issue is. You care about why there is a conflict and why they perceive that.

One of the things that I did in this course is to have an exercise for people to actually practice active listening which is listen to what they said, feed it back and say, “Did I hear this correctly? Is this what you said?” and making sure that they understand that you really heard them before you try to solve anything.

I think that that’s a skill that really takes work. It was an important skill for me to learn and it really served me well over time.

Patti: I love that acronym, Mike. WAIT, Why Am I Talking? Just WAIT. Absolutely brilliant.

When you do that, you can really listen to what the other person is saying, take it in. I have learned that a lot of times what they’re saying is really important to get to the answers that we’re both looking for.

You mentioned a focus on interests and not positions. Again, very interesting positions or conclusions. You don’t want to focus on the conclusion, you want to focus on what’s important to this other person.

Again, there’s that empathy coming through again. When you empathize with what is important to them, why they believe so passionately about whatever the issue might be, you can understand it and then come up with solutions that are going to work for everybody involved.

When you think about this and you’re involved in this, what do you find whether it’s two people, or two departments, etc. – in terms of the most effective approach in getting people to work together?

Mike: I think that you need to make sure that they understand what’s a position and what’s an interest and get to the point where your interests are shared. That you do want the same thing ultimately. Whether the same things are better patient care in a hospital situation.

Whether the same thing is a better profit margin and why that might be, or better nursing care, or more nurses and how that helps patient care, whatever it might be, what are the interests there.

Patti: I’m sorry. I didn’t mean to interrupt you there, Mike, but it’s so interesting because as your talking, I’m thinking everybody deals with this. In my world if I’ve got a husband and wife and we’re talking about a financial issue and they have a disagreement in terms of how to approach it. I’ve learned over the 30 years is to really zone in on what’s most important about this to you.

And then they will say something and usually that’s not the real answer. It could be, “What’s most important to you about your investments?” “I want to make sure that they’re really safe.” “So, what’s most important to you about safety?” “Well, I don’t want to lose the money.”

“What is it about losing money that’s worries you?” And then we get to the real…it’s security. And then I go to usually the husband who wants to be more aggressive, “What most important to you? What does that mean to you?”

We get to the same place because, ultimately, for the husband in this example when I ask, “What’s most important to you?” Well, he feels it’s important to invest it for growth because that’s the only way they’re going to be secure. They both want the same thing. They’re just going about it in different ways.

Once we arrive at that by asking those questions, as you do, we come to a solution that works for both.

Mike: I really think that when you dig down and work hard at it, you can find shared interests. When they really understand, yeah, we both want security, then you begin to peel back the onion to say, “Well, how are we going to get there?” Often, it’s an alternative solution in our situation.

If somebody wants, let’s say, a new piece of equipment. Understanding why they want that. Maybe it’s because somebody in a competing hospital has that piece of equipment. When, in fact, it’s not really at this point necessary or maybe it’ll be a lot less expensive as technology changes in a year or so.

You sit back and say, “OK, so you’re worried about them having a better market share than you are? Let’s figure out another way to deal with that than buying this piece of equipment.” That’s what they’re really interested in, “I want to make sure that my practice is growing, that I still can take care of patients, etc. I don’t really need that piece of equipment right now but I’m worried.”

Getting at that and then figuring out another solution, to make sure you understand, “I want to make sure your practice is successful. I want to get to the same interest you have. Let’s figure out maybe another way to do it that would make more sense and we can get the piece of equipment next year or the year after when it’s better developed, and it’s smaller, and it’s all those things.”

So that comes up a lot.

Patti: It’s so interesting. As I listen to you, Mike, I think you are brilliant in terms of always instilling hope. Always focusing on the solution that we all want the same thing. You both want the practice to grow and that you’ll work towards that. Again, that’s why you’re such an effective leader.

You are open, the people knew they could approach you and that you would help them brainstorm and solve whatever the issue might be. It is so important for people to know that you are on the same side.

Mike: Once they understand that you’re all trying to do the same thing and that you do appreciate why they’re asking for what they’re asking for, or why they’re taking the position they’re taking, what their interest is, you can begin to get at the solution.

Sometimes the solution is figuring out how to make the pie a little bigger, so that everybody gets something out of it. Those aren’t necessarily easy but if you work hard at it you can often come to those conclusions.

Patti: By doing so it becomes less of a fight, less of a conflict and both parties save face. Everybody wins in a situation like this when you take the time and really understand.

Mike: Sometimes what happens is, tempers run high, people feel like, well Dr. X got this, why didn’t I and they get very upset and concerned. I think one of the important things is understanding how to diffuse the tension out of these things sometimes, because if you are in a situation where things are very tense, you really can’t get there.

Diffusing the tension by making sure they know you’re listening to them, you understand their concerns, you share back what you heard, you clarify what they meant and then they go, “OK, he gets it, he heard me at least or she heard me at least. Now OK, let’s go, what’s next.”

Diffusing this fist pounding, I want, I want, or I need, I need or I can’t believe you’re disagreeing with me. Whatever it may be, you sort of diffusing the tension by making sure you tell them, “I get it. I heard you. I understand. Is this what you said? Did I hear this right? Then, “Why did you get there. Why are you there?”

Making sure that they know that you’re not just, not listening, you’re really listening, you’re really understanding, you empathize with their interest but now, how do we get there in a different way, if there is a different way.

Patti: You know as I listen to you Mike I think wow, is it a time consuming process? It takes time to really listen, to reflect back and to check in from time to time. Yet, maybe I’m wrong but it seems to me that by doing that you’re saving so much time in the long run.

Mike: Oh absolutely, it’s a time saver taking a little more time to do this carefully and right saves you 10 meetings about this in the future and a lot of pain and agony.

Patti: As we pull this together and we think about conflict, is there one or two things that you think are most important as it relates to this conflict management? Again, whether it be in the workplace, whether it be at home with our kids, whether it be in any role that we have as teachers, as other leaders or followers.

Let’s face it, a lot of times the team, different teams are going to have conflicts between each other. Are there attributes? Are there anything specific, 1, 2, 3 things that you think are most important as it relates to this?

Mike: Not to repeat it over and over again. Being an active listener can’t be overestimated as important. When people really feel that you heard them, and that you tell them you heard them and they understand you heard them, that goes a long way. It’s important because you have a relationship that you want to continue for the future, that you need to have the person.

First of all, you need to consider the person you’re having a conflict with is actually your partner in this, not your adversary. How are we together as partners? Getting on the same side of the table, sometimes literally, and figuratively helps as opposed to the opposite side. How can we solve this problem together goes a long way and making sure that your partner in this saves face.

That’s key. That may be very difficult sometimes, but it’s really important too. These things are going to come up over and over again. It’s not going to stop. There are going to be other issues. When resources are tight, and people are vying for the same resources and have the same ideas and really feel strongly about the way a company should be moving and other people feel differently. You’ve got to be able to get to this or it’s paralyzing.

Patti: That’s the one thing that stops, everything is that paralysis and nothing gets done, nothing gets resolved and there’s this awkwardness. What makes any entity whether it be a hospital or a company or a family work is that open communication, that trust and the relationships that you have with the people that you’re around.

Mike: Where people really find it most difficult is when the personality issues get there. They’re like, “I really have trouble with this person. They’re not like me. I can’t quite deal with this.” You got to separate that from what the real issue is and try to deal with it. If you don’t, you’ll never get there.

Patti: When you see that happening, do you point it out to the people and say, “You’re focusing on the person and not the…”

Mike: Yes.

Patti: Call them on it right away.

Mike: Right away. You need to get at what are we talking about, what are our interests. Let’s forget about everything else and try to get there.

Patti: Excellent. Mike Buckley, thank you so much. This has been terrific. Thank you so much for your time and your expertise. I can’t think of a better person to talk about this whether it be leadership in general or conflict management. You are the guru in my eyes and clearly in the medical community because you’re speaking about this. You are the go to expert. I’m so grateful that you chose to spend time with all of us today.

Mike: Thanks for having me, Patti.

Patti: You bet. Thank all of you. Thanks to you for joining us today. Thank you for tuning into many of our podcasts. I’m so glad and I’m so grateful for the feedback that you have been giving us. I’m so happy to hear that they’re making a difference in your life. That’s why we do these things.

Until next time, I’m Patti Brennan. Thanks again for joining us and I hope you have a terrific day.

Ep27: It’s Leadership, Not Likership!

About This Episode

In Part 2 of our 3 Part special series on leadership, Patti sits with retired US Army Ranger, Captain Kristopher Thompson. Kristopher describes the differing leadership styles within today’s military. He details what worked, what didn’t and the qualities it takes to successfully lead with integrity – both within military ranks, as well as civilian life.


Patti Brennan: Hi everybody, welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today I have a special guest with me. Kristopher Thompson is a member of the team here at Key Financial. I want to just tee this up for all of you, to give you a sense of what an incredible human being, and how lucky I feel in having Kristopher as a part of this team.

About a year ago or so, Kristopher was introduced to me and I received an email and there was a cover letter. Along with the cover letter and the resumÈ, there was a letter of recommendation.

Folks, this was not your average letter of recommendation. Let me just tell you. It came from a gentleman by the name of Christopher Midberry who was as it turned out, Kristopher Thompson’s battalion commander. In this letter of recommendation, it was a memorandum for the potential employer of Kristopher Thompson.

He basically outlined very succinctly why he believed that Kris was an incredible, hire of potential asset for any company smart enough and wise enough to bring him on board. He talks about Kris’s experience in the army. He starts out, for example, in talking about his performance.

I’m quoting right now, “Captain Thompson was without a doubt one of the most confident and inspired soldiers serving in the ranks of my battalion. I have absolute faith in his abilities. He was deliberately assigned to company Executive Officer because of his intelligence and drive.”

He goes on to talk about intelligence and drive and what he believes are the most profound characteristics of Captain Thompson. “Honesty, team work. He continuously sacrificed his time for others. Leadership, Captain Thompson consistently managed difficult situations under stress timelines. He was tasked with a job that could not be failed without terrible repercussions.

“Plagued with complex difficulties and minimal guidance, Captain Thompson achieved success in all endeavors. His presence. He is a quiet, professional with a strong sense of pride and duty. Intellect, he has a unique ability to handle multiple scenarios and tasks simultaneously with very little guidance. He exercised mental agility without unnecessary stress.”

In summary, Kristopher is a driven and intellectual person that continuously strives to not only be the best but to make those around him better in the process. He is moldable, adaptive, and best suited in tough and stressful conditions.

By the way, can’t think of a better place than a financial planning firm managing a billion dollars for people who are relying on us to make sure that we are preserving and growing their assets to do the things that they want to do. Captain Thompson, welcome to Key Financial and welcome to the podcast.

Captain Thompson: Thank you, Patti. Thanks for having me on. I appreciate that.

Patti: Folks, when we were talking about this today. I was talking with Kristopher about what he’d like to talk about and share with all of us. I wanted to bring his Army experience, to explain what his experience, and how it has helped him in his role here at Key Financial.

We’re talking about leadership today. You might think, “Well, gee. Most of the people who talk about leadership have had years and years of experience and lots of gray hair to go about it.” I think it’s important.

Whether you are a millennial who is listening to this or parents of a millennial, it’s really important for you to know that you don’t have to wait to have gray hair to have great leadership skills like Captain Thompson here. Thank you again for joining us.

Let’s start out, Kris, and talk about what you believe is important as people engage in this topic of leadership.

Captain Thompson: Patti, thank you again for having me on. The introduction was – I haven’t read that recommendation letter in quite a while, so I really appreciate that.

Patti: Folks, I want you to know. He was blushing.

Captain Thompson: Yes, absolutely. One of the more important things that a leader brings to the table and probably the biggest impact that a leader can have is the culture that a leader creates. I, again, from the Army. The Army is steeped in tradition and in culture from the highest ranking generals in the Army itself, all the way down to a company.

A squad leader, which is a leader of about 12 guys or so, everyone has their own culture. Every leader brings a different culture to the table. I just felt like that is something that I wanted to expand on. Just building, at any level, whether you’re the CEO of a Fortune 500 company, or you work in the back here at Key Financial with me and you’re in the planning department. Just bringing a culture of trust and a team mindset to the table.

Patti: It’s so interesting because one of the things that I’ve learned about you, Kris, is that you kind of exude…you become that go to person because of your own credibility and your willingness to be not always the leader, but also a great team member.

A great follower. Someone who’s really thirsty and eager to learn different aspects of not only what you’re doing, but what other people are doing as well, so that you can lend a hand and be a go to person in whatever we might need.

Captain Thompson: Absolutely. I think in my time that I spent in Ranger School and the time that I spent in the leadership positions, in the various ones that I had in the Army, it was about understanding that you are a role player.

Often times that means that you have a team that looks to you to make wise decisions in tough times. You also have leaders of your own that rely on you to take the helm and make those decisions and carry the ball forward, so to speak.

Patti: Exactly, you’ve got to be able to execute. Tell me about Ranger School. This is a side bar, folks, I always wanted to ask Kris what Ranger School was like. What made you to do that and become a Ranger?

Captain Thompson: My brother is in the military as well. He’s a Special Forces Major right now and a Company Commander in the Fifth Special Forces group and he is an Army Ranger. He was before I was. Essentially, through the time, my late college career, I was deciding whether or not to join the military.

Ultimately, I came to him for advice and he basically told me, “If you’re going to join the military, here are some things to look for” and “Ultimately, if you want to be the best that you can possibly be and really stretch yourself beyond what you think you can do, Ranger School is the place to go do it.”

I would say to sum up the couple of months that I spent at Ranger School, it’s tough. They put you in situations that, day to day, I wouldn’t think today that I could do it had I not already done it and been there.

They not only put you in those situations, but then they expect you to lead up to 50 soldiers and still complete a complex task. It was a tough situation. Not a whole lot of food. Not a whole lot of sleep either. I learned a lot about myself and I learned about leadership and just being a team member and all that.

Patti: Wow and you carry the other people right along with you and as long as everybody’s in the situation together, you win together.

Captain Thompson: Absolutely.

Patti: To me, that is the hallmark of a great leader. To really understand the importance of everybody on the team. Nobody’s better than anybody else. I think that in Ranger School, just hearing you makes you realize that we’re capable of a lot more than we might think in this little brain of ours. It’s a cerebral thing.

We all have these limiting beliefs and these things that we think, “Oh, I could never do this, I could never do that.” That’s one of the reasons why I also want to bring these topics on our podcast. Again, whoever you are, whatever you do, you can do these things.

There’s a framework to follow where you can really elevate yourself. Not only in your own eyes, which is the first and most important thing that we do, but in the eyes of other people so that you get additional responsibilities and that you are able to do things that maybe you never thought you could do.

Captain Thompson: Absolutely. A much wiser man than myself once said, “The problem is not the problem. The problem is your mindset about the problem.” Just learning how to rewire yourself to accept adversity and strive to drive through it and accomplish your goals.

Patti: That’s phenomenal. Again, that comes from the top also. Believing that your team has the ability to drive through whatever it is that might be facing them. That’s really interesting.

I think that as you think about the tactics. We can talk fluffy stuff until we’re blue in the face but let’s talk tactics and develop a structure for everybody that’s listening in terms of, “What do you think are the most important principals?”

Captain Thompson: For the principles of leadership, there is, the be, the know, and the do. Be, technically and in tactically proficient. Know the factors of leadership. Who are you leading? Who are you as a leader? What is the situation? How can you communicate that to the people that you’re leading, your team?

Then the do, seeking responsibility, setting the example for others to follow, developing responsibility amongst your teammates, getting buy in from your team. They are not necessarily the ones making the final decision if they’re not in that position. However, they should have buy in. They should have input.

Patti: Let’s go back. This is really interesting, folks. You’ve got three major categories. They are be, know, and do. Let’s start with be. You said something really interesting, Kris. It’s something I want to drill down on.

That is when you are a leader, in order to be respected, in order to be followed, you have to be demonstrating the values and the qualities to make people want to follow you.

To be technically and tactically proficient, to be somebody that they will look up to and say, “Wow, this guy, Kristopher Thompson, is really good at what he’s doing. He’s not asking me to do anything that he wouldn’t do, himself.”

The knowing, this is also important. When you think about you as a leader, know yourself, how would you describe yourself as a leader as it relates to other types of leaders?

Captain Thompson: Me, personally, I like to know what I know and understand what I don’t know. By that, I mean, if I don’t know what I’m looking into, I try to find the nearest subject matter expert to help me either get there, or I may delegate that task to them if I’m in the position to do so.

Me, as a leader, know your strengths, know your weaknesses, and then use your team to work within that frame.

Patti: You don’t have to be a person of all strengths. We all have our weaknesses.

Captain Thompson: Absolutely.

Patti: I’m a big believer in focus on your strengths and delegate your weaknesses, because if we work on improving our weaknesses, we end up having a lot of strong weaknesses.

There are other people who are good at this thing that I am not very good at. I, as a leader, am going to delegate that, let them do that, let them run with it because they can do a much better job at it that I will.

It’s so important that in the Army, you learned that you’ve got to understand yourself as the leader, and understand what your strengths and your weaknesses are, and then be able to work with that and your team to lead them effectively.

Captain Thompson: Again, it’s cultivating that team through, knowing yourself, and building that culture up. If you’re grasping at straws, people will see that eventually. You don’t want to be in that position.

Patti: Exactly. Again, that would take away from your credibility. One thing that I’ve also noticed about you is that you genuinely care about the team.

Captain Thompson: Absolutely.

Patti: As a leader, we can all seat on our high horses and think that we’re better than other people, but we’re not. We’re not.

When you reach, weather you’re the leader of a company, or a hospital, or a team of any kind, or the leader in your family, to understand what motivates your team and the people that you’re working with and strive to create an environment, the culture that emphasizes their strengths and help them to be their best self is really important.

You do this so incredibly well, because you do it in a very nontraditional way by asking questions. People love to be the experts. Even when you might know the answer, you’re elevating that person by asking the right questions.

Also, you motivate. You have a way of motivating in other ways. You don’t always necessarily motivate with money. You motivate with other types of rewards like, “Hey, if you’ll help me out with this, I’ll take over that case for you.”

Captain Thompson: Yeah. You can build motivation through just the team mentality in and of itself. If you and I are trying to tackle a subject or an issue and we’re bonding together over it, ultimately when we accomplish that goal, we’ve motivated each other just by being good teammates. You can do that without the false third party motivation like you talk about.

Patti: Absolutely. How often do I go to all of you and say, “You know what? I’m struggling with this issue. I’m not sure the best approach. Let’s spend a half a day figuring out different creative approaches. We’re not going to do all of them. Let’s figure it out.” I just unleash you guys to do what you’re good at.

Captain Thompson: Absolutely. We all get buy in and like being a part of that team culture.

Patti: It’s fun. It’s really fun. We’ve talked about the be, and the know. Be the best person you can be. Know yourself, and know your team and the people that you are leading. What about the do? Let’s talk about these things a little bit more and, like the first one that you talked about, seek responsibility and take responsibility for your actions.

Captain Thompson: If you’re in a leadership position or you’re perceived to be a leader, nobody is going to follow you if you’re not looking for that next thing, trying to create goals in order to accomplish goals. It’s just important to maintain that drive behind you. Then it bolsters your team to that level as well.

Patti: It comes down to communication, doesn’t it, Kris? Again, if people don’t know that the ladder is on a particular wall, they can’t know that that’s where they want to go, but communicating what those goals are and also emphasizing why it’s important to them.

Captain Thompson: You have to create a vision and just keeping everyone informed as either the vision changes or the circumstances within that vision change. It’s important that everyone is on the same track.

Patti: Can you give me some examples of as the captain, as you were leading your group, where you might have had a challenge of some sort or where your commander gave you a particular goal that you thought was insurmountable? You didn’t know how you were going to achieve it. How did you deal with that?

Did you go back to your commander and say, “I’ve looked at this different ways, and this is not achievable in a particular time frame”? Did you go to your team, the people that you’re leading, and say, “OK, no [indecipherable 17:26] . We got to find a way to make this happen”? Give me an example of how you did that.

Captain Thompson: I can give you two examples and one of each, because one eventually does lead into the other, actually. We had, like you said, an insurmountable goal that we needed to accomplish. I went to my commander knowing that the time that we had allotted, it was not going to be possible.

I came to him, and I said, “Sir, we cannot do this. It cannot be accomplished.” He looked at me, and he said, “Build me my battleship. You and I have had this discussion once before.” He said, “Build my battleship.” “I don’t know what that means, sir. You’re going to have to elaborate for me.”

He said, “When I was an Executive Officer, I told my commander I couldn’t do something he looked at me and he said build me my battleship. If I tell you to build a battleship, I expect a battleship.” He kind of sent me on my way. Ultimately, the goal’s not accomplished. The time frame was literally impossible.

We made some concessions, we made the objective of the training happen at the end of the day. In a way, we built the battleship. Maybe a smaller battleship that day, but it taught me something. Go ahead.

Patti: I think it’s interesting because what he did was he set the expectation. He set the goal for you and sent you on your way, and you’re probably shaking your head saying, “There is no freaking way I’m going to be able to get this thing done.” Yet you still did it, and you recognized that maybe you got to renegotiate the timeline.

The end goal, the issue was training. A particular training exercise that needed to happen. He got his battleship, didn’t he?

Captain Thompson: Exactly, yeah. The particular way he wanted it accomplished wasn’t necessarily possible. However, the end state, what we needed to do to get soldiers trained was ultimately accomplished, which is all you can really ask for at the end of the day and certain circumstances. That’s what we went for.

Patti: Good. I interrupted you, so how did that lead to the second example?

Captain Thompson: Well they taught me a sharp lesson. That there are speed bumps and there are road blocks. Speed bumps, I can get over speed bumps. When it comes to a road block, you may need to rely on others. Rely on higher headquarters, things of that nature. For example if I have a really tough question I got to go to Patti Brennan, right?

It taught me the difference between those two and how to navigate those waters and what’s what. Seeking out the end state. Ultimately, some time later down the road when I was a little bit more seasoned we were met with an even more difficult task. This time, I rallied the troops. This was a “we must make this happen” goal.

There was no go to the commander and tell him it can’t happen. I rallied the troops and essentially started with organization. Disseminating the information of this is what we’re doing, this is why we need to do it. This is the plan, if you have any sort of objection or if you have…

Patti: Another approach maybe?

Captain Thompson: Exactly. A better approach of how we could do this, maybe we can work that in, so come to me, let me know. In the meantime, get moving. I’m still open to options. We are going to keep pedaling this bike.

Patti: That is terrific. You really got your buy in from your team because you weren’t pontificating, you weren’t pretending to be the man with all of the answers, and you appreciated the fact that they may have expertise or ideas that you don’t quite have. That made them want to do well, to really accomplish this task, not only for themselves but also for you.

Captain Thompson: Exactly.

Patti: A lot of times, people will go to the end of the Earth really, to really make a difference in the people that they care about, that they respect. Again, it’s all about leadership.

You think about other things…I love that roadblocks versus, what was the other thing, the speed bumps and roadblocks?

Captain Thompson: Speed bumps and roadblocks.

Patti: That’s a great metaphor. I’m going to have to remember that. Is this a speed bump? “Fine, find a way to get over it yourself,” versus a roadblock, “I’m totally here, we’re going to figure this out together.”

Captain Thompson: Absolutely.

Patti: That’s terrific. What you did in that example was you communicated. In other words, you explained what needed to happen, why it was important, and then laid out the road map for the team.

In getting the buy in, you welcomed the feedback and made sure that they understood what the task was at hand, that it really was a drop dead “We got to make it happen.”

Captain Thompson: Absolutely, time was of the essence. In all honesty, I would have sat down with them to hash the plan out even more if the time permitted, but it was kind of, “We got to go. We’ll build the plane in flight if ideas come up.”

Patti: That is terrific. I think about the army, and I think about your role as our front line, and a lot of times, that’s really what you’re going to have to do. You’re going to be building the plane in the air, and figuring it out as you go along.

You think about the life or death decisions that you have to make on an ongoing basis. It just gives me chills, in terms of what you’ve learned and what you’ve done for our country.

I also think that it’s important as you lay these things out, that it is leadership. Not everybody is going to like it. Not everybody is going to be your best buddy and your friend, nor is that usually appropriate.

What do you think is the mistake that leaders often make as it relates to you leading a team?

Captain Thompson: I sat down, it was not Colonel Midberry, but another colonel. The first battalion commander I ever had sat me down. I was a young second lieutenant. He said, “Listen, first things first. It’s leadership not likership,” which at the time I thought nothing of it, but it resonated throughout the next five years.

Ultimately, I think I’ve had great respect for every one of the soldiers that I worked with. I felt that they respected me in the same form of fashion. We had friendships, but ultimately, we were not so familiar with each other that my ability to make tough decisions on their behalf often played into that.

I remained impartial because they knew we were professionals and we had to maintain everything above board and I wasn’t going to make a decision based on favoritism or anything else like that.

Patti: I think that if that comes into play, then your credibility goes by the wayside. If people think that you’re playing favoritism, that you’re doing for some and not for the others, it’s a virus that leaks through the organization and really undermines your effectiveness as a leader.

It’s hard to do though, isn’t it? You want to be friends with all these people, there a lot of fun and that sort, but you got to draw that line from time to time.

Captain Thompson: You’re also in in positions that you’re mutually going through tough times together. On one hand those tough times drive your friendship closer but they also create situations where as a leader I have to distinguish myself.

I have to make a tough call here and separate myself from being again just too familiar. Not too friendly, there’s nothing wrong with being friendly but at the end of the day when things happen you have to make the call.

Patti: Wow, that’s really amazing. It’s interesting this is the 75th anniversary of D Day. I had the wonderful opportunity go to Normandy and learn what happened on that day.

I think about you and I think about all of the men who gave their lives and the people that had to make those kinds of decisions to send certain people or let certain people stay behind. My own father in law was there.

He was in the Army and he was asked to stay back. He was not in that first tranche of men that landed on the beach. He often asked, he never talked about it, but he often asked and wondered, “Why wasn’t I one of those that was in that first line of boats?”

He ended up going into Normandy and he ended up serving and doing that. I thought about the people that had to make those decisions and how difficult that must have been.

It’s really amazing and so neat to be over there and to see that the people of France especially in Southern France. The Americans to this day are still the heroes. That the American soldiers…If it wasn’t for what the American soldiers did, they’d all be speaking German.

It’s just hopefully and I really mean this, we’ll never have that kind of a conflict again. I can’t begin to tell you how comforting it is especially as I’ve gotten to know you Kris and to know at such a young age you have so much presence and ability to make those tough decisions and that sense of duty that your commander spoke about.

I think that there are people in our military just like you who are willing and able and trained to go there and serve on our behalf. It’s just the coolest thing in the world. I’m so grateful.

Captain Thompson: Thank you. I appreciate that.

Patti: Getting back to leadership now. Now here we go and folks you might be wondering, “OK, what happened after the Army?” Let’s tell your story because I think it’s a great story, right? You’re in the Army, you’re getting all these accolades, your rising the ranks very quickly, much faster than normal.

You have a fork in the road. You’ve got to make your own personal life decisions. What brought you to Key Financial? What brought you to this point? I know this was not what you were expecting, but it’s a personal side. I think it’s really interesting.

Captain Thompson: I ultimately made the decision that…I met my now wife Sarah Thompson down in Nashville. She was going to school at Vanderbilt. Through a mutual friend of ours an Army buddy of mine, Jim McIlvaine, he introduced us. They went to school together and fell in love.

I ultimately knew that I was going to be leaving the military to start a family. That was how I started that fork on the road and then Key Financial. I am lucky enough to now work with my mother-in-law.

She works in the marketing department here. She’s actually in the room right behind me. Hello. She introduced us to us. I don’t even know if you remember this. This was a few years back when I was still pretty deep in the military. It was a very…

Patti: Casual conversation. We just connected, and one thing led to another. To me, one of the things that impressed me so much about you as we were talking about this is that you’re always striving to be better, to get better, to learn more.

When the opportunity came to my attention that you were looking for something that you ideally would like to go for your MBA, and you were looking for something to transition into that next degree and your MBA, which I’m so proud to say that you are starting here in September.

I thought, “This is the kind of guy I want to have here, somebody who’s always striving to be better, to learn more, and to look at different ways of solving problems.” Frankly, as you all know, that’s what we do here all day long. Let’s get back to leadership. Let’s talk about the experiences that you had while you were in the Army, what different styles and different types of leaders.

What’s so interesting, Kris, for me at least, is your emphasis on culture and your emphasis on setting the tone. You mentioned one commander in particular, that the Army was going through a very difficult transition. This commander came on board and, right away, the culture changed.

Captain Thompson: Yes, I was specifically talking about Sergeant Major in the Army, Daniel Dailey. The military was going through some sequestration problems. There’s budgeting issues and cultural issues that followed along with it because everyone was tightening the purse strings.

He came on and drove the focus back to the soldier and not the money that dangles around the soldier in order to get them trained. His emphasis was all about readiness. Train the soldier and just be ready for anything, and we will figure out the rest in the meantime.

He actually came out with a list of 10 tips for leaders. There’s a few of them that resonated with me even more so than others. I just wanted to mention that to you. One of them is, “If you have to keep reminding everyone you’re in charge, you’re probably not.” Right, that’s something that stuck with me. That’s simple enough.

Actually, Colin Powell mentions in his book that if you ever have to say, “That’s an order,” then it’s…

Patti: It’s over.

Captain Thompson: Yeah, exactly. Another one of Sergeant Major Dailey’s top 10 tips for leaders, “If your only justification for being an expert on everything is having X number of years of experience, then you need to retire.” I thought it was funny.

He obviously made a little bit of a joke about it when he wrote that down but, at the same time, it sat with me because I find myself continually trying to strive to be on the next level, at least in term of learning and things like that, progressing continually.

If you’re not continually progressing, then you have credibility issues maybe within your team. I thought that was very interesting.

Patti: One of my favorites of Sergeant Major Dailey’s top 10 tips is this one, “Think about what you say before you say it.” He’s quoted as saying, “I’ve never regretted taking the distinct opportunity to keep my mouth shut.”

Captain Thompson: I like that one.

Patti: Me too. I think that’s great. That’s outstanding because, all too often, we, as leaders and I’m going to include you on that we have the experience. We have ideas and ways to solve the problem. We’re so quick to offer the solutions. Unfortunately, when we do that, it shuts everybody down. Unfortunately, even worse is that those ideas are probably better ideas.

Captain Thompson: They very well could be, at least coming from a more diverse set of minds.

Patti: The people who are really doing the work. Why in the world would I know about doing your job that would be better than what you know about doing your job and maybe another way of approaching it?

Captain Thompson: That’s actually what you were talking about earlier when you come in the back, and there’s an issue. We have to solve it. That’s where it comes in. We’re trying to figure out process implementation, things like that, and smoothing out all the edges.

You go down on the ground level to get that information. It works great for the team because, ultimately, you have meetings and all the stuff. We’re in the trenches trying to get it done.

Patti: Yeah. What’s cool about it is…Again, this is the way I feel. I feel like everybody cares. Everybody cares. Just like your commander said, it’s about the soldier. To me, it’s about the client.

How can we make sure this client experience the end result of what they not only achieve but also feel, is the best experience that we can possibly do? Let’s just use all of our resources and all of our talent to arrive at those ideas and solutions and, most importantly, execute. Get it done.

Captain Thompson: Absolutely.

Patti: Kris, this has been phenomenal. Thank you so much for bringing your perspective of being in the Army, rising through the ranks, being a ranger. Now we have the great honor of having you here at Key Financial where you get to apply those things and teach all of us those same things.

What a privilege it is for me to hear this and to know that I can go to you when I’m struggling with something and get your honest feedback and say, “How’s this coming across?” As you all know, and I think that anybody that knows me really well, I may be the CEO of Key Financial, but I’m the last person. There’s a saying, leaders eat last. I believe that.

These people don’t work for me. I work for them. I work for everybody that works here. I work for the client. That’s the spirit that we have. That’s the culture that I’ve developed and hoped to continue to nurture and grow with great people like you.

Captain Thompson: I appreciate you having me as a part of the team and having me on the podcast. Thank you very much.

Patti: Absolutely. Thank you all for being here as well. I hope this was helpful. For those of you who may be younger, recognize Kris is in his early 30s. He’s already developed these characteristics, the integrity. He’s a go to person for so many people already.

If you have any questions, if you’d like to hear different topics, go to our website at keyfinancialinc.com. Until next time. I am Patti Brennan from Key Financial. I’m so grateful that you joined us today.

Ep26: Physician to Hospital CEO: A Leader’s Journey

About This Episode

How does an infectious disease physician in a private practice become the CEO of one of the biggest hospitals in Philadelphia? Patti discusses the qualities and personality attributes one must possess to successfully rise to leadership positions, with Mike Buckley – the recently retired CEO of Pennsylvania Hospital. Mike rose from infectious disease specialist to Chief Medical Officer and Chairman of Medicine and then ultimately navigated the mergers of two of the nations’ oldest hospital systems. Listen to find out what he traits he thinks all successful leaders possess and see if you have the art of strategic persuasion!


Patti Brennan: Hi everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you to want to protect, grow, and use your assets to live your very best lives.

Our topic today is one that I’m really excited about. Today, we have Mike Buckley. Mike is a former CEO of Pennsylvania Hospital and former physician.

Mike, welcome to the show.

Mike Buckley: Thanks, Patti, for having me.

Patti: Absolutely. Mike, when we were talking about different subjects and different things to think about, and I was thinking about, “Wow. Wouldn’t it be terrific if you could come on this show and talk about your career and some of the things that you learned over your entire career, and how you’ve added value, not only to your patients, but to the people that you led over the years?”

I thought about leadership and how you’ve got to be the CEO of one of the largest hospitals in Pennsylvania, one of the most respected hospitals. From starting in private practice as an infectious disease physician to the CEO of a major hospital, now a University of Pennsylvania hospital, tell me, how did you get there?

Mike: The first thing to say is it happened very gradually. The first 15 years of my career there, I really focused on being a good physician. That’s what I was interested in. That’s what I loved. That’s what I trained to do and that’s all I ever thought I would do at the time. I took care of patients. We built a big practice.

We saw a lot of people. Infectious disease specialists tend to be consultants on almost every specialty. Almost every physician’s patients, at one time or another, get sick with either an infection or something they’re concerned might be an infection. We get to know all the physicians at the hospital.

Over time, what happens often is, if your clinical skills are recognized and people think you have good judgment, good clinical judgment, that you communicate well with patients and families and them, and that you’re helpful, they begin to trust your judgment in general. That sometimes, rightly or wrongly, carries over into other areas.

People start to think, “Well, I trust this person’s judgment. They’re very helpful. They seem very competent. Maybe they’d be good at a leadership position where their decisions might actually affect me.” I think that’s often how it happens. When I think about all the physician leaders I know, that was often the way they got there.

First, being recognized as excellent physicians, whether they’re clinic physicians, or researchers, or whatever they might be. Then, that carrying over into other things.

Patti: It’s interesting because again that inner drive to be really good at whatever you are doing at the time says a lot about a person. Your character, the fact that you just want to be helpful to use your term. That can translate into other areas in which you can be helpful. I can certainly see that.

Was there a particular moment or something you volunteered for or a decision that you made that might have separated you from other people as these opportunities came about? Or again was it a general thing, one thing led to another?

Mike: I think a little bit of both. The general piece was I took on small leadership positions. Then, a little larger. Then, a little larger. As times changed at the hospital I was asked to be president of the staff, which is something that a lot of people get to do.

It happened at a time that was particularly crucial because we’d had a leadership change at the CEO level after somebody who’d been there 38 years left. It was pretty tumultuous. It didn’t work out all that well. I was involved in the senior physician piece of it. I was on the board of the hospital during that time for a couple of years and got to see all this, and I learned a lot from it.

Then, in 1997 is when the Pennsylvania Hospital, which is at 8th and Spruce, the oldest hospital in the country, founded by Benjamin Franklin and Thomas Bond in 1751…

Patti: No kidding? I didn’t know that. Impressive.

Mike: It was the first building that was built specifically as a hospital. There were other places in the country that were almshouses for the poor that may have turned into hospitals later, but this was built specifically to take care of the sick poor. That’s why it was there.

The University of Pennsylvania Hospital – The Hospital of the University of Pennsylvania, HOP, is at 34th and Spruce. We’re at 8th and Spruce.

We’ve had a long term academic relationship with them teaching medical students and so forth, but we were independent at the time. In 1997 when a lot of the hospital mergers began to take place, a very difficult decision was before us as to whether to be owned by any health system.

Then, should it be Penn or should it be Jefferson? Both good places. It was a difficult time. I would say that staff was somewhat split. The board was somewhat split. But ultimately the decision was to go with Penn.

Patti: And what was your role at that time?

Mike: I was a board member, but I also was also at the time, interestingly involved a little bit at Jefferson because they had asked me to come over there and help them with their infectious disease section on the clinical side. So I knew some people there at Jefferson. I knew people at Penn for many years there. I trained there. I ended up my training in infectious disease at Penn. It was, which one was it? And it was decided it was Penn.

Whenever these mergers happen where you take a hospital like Pennsylvania Hospital, which had been there for a long time, the staff was primarily in private practice, very successfully so, and you’re then bought by a university and a university hospital where the primary model is employment, it creates all kinds of worry.

The physicians begin to think, “What’s Penn going to make me do that I don’t want to do?” Like be employed if they don’t want to. “And if I don’t do that, are they going to send somebody down here to compete with me?” There was a lot of worry and anxiety and angst.

At that point, the leadership at the university asked me if I would be willing to take on a job as an Associate Dean to help the merger work. It was a very difficult situation where I was trying to help my colleagues at the hospital I had been my whole career, at that point 20 years, a little more, while being employed by the hospital and system that was taking us over.

That’s where, I think, people’s trust in me was really tested. Was I really going to be a person that was going to advocate for my colleagues to the place that actually was employing me? That, I think, was really a crucible for me for two years, trying to make these things work.

I will say I had the advantages of 20 years at the hospital where people knew me, and I also knew several people in senior leadership at Penn who happened to be friends, who trusted me and my judgement. I said to them, “I’ll take this job as long as, when I tell you something, you believe me, that this is not the time to do this, or that is the time to do that.” That was very difficult, but I think very important for a couple of years.

At that point, in 1999, I was asked to take on a role as Chairman of the Department of Internal Medicine at the hospital.

Patti: Big role.

Mike: A big role. It’s a big department, had its own residency program, responsible for a lot of faculty appointments and resident issues and teaching and so forth. Then a year later, our Chief Medical Officer decided to retire and they asked me if I would temporarily take on that role as well, and I ended up doing it for the next 10 years, along with being Chairman of Medicine.

There were a lot of things that happened because of circumstance, but the job of making the merger work never went away. I just changed positions, but those issues were always still mine, and when I became Chief Medical Officer, even more so. So that was a period of time that I think probably was the most important.

Patti: And then at what point did you become the CEO?

Mike: 2010. So 10 years or so of being the Chief Medical Officer and the Chairman of Medicine. That came up because a very good, very successful CEO that we had, a woman, decided to take on a larger job in a different health system. I found that out on a Monday morning, that she was leaving. Monday afternoon, they came and asked me if I would be interested in taking that role.

Patti: Wow.

Mike: That was the first I heard of it, the first I thought of it. I was pretty convinced that this CEO was going to be there until I retired, until the end of my career, and I was very happy doing what I was doing.

Patti: Wow. So it’s very interesting. It kind of is a great segue into one of the things that I wanted to talk to you about. Because as I have gotten to know you as a friend, Mike, I have learned that your communication skills are off the charts. And your ability to influence others with integrity, with that wonderful character and that integrity that you have. Always with the belief that you are going to do the right thing, and people know that about you.

It’s really interesting when we were talking about this, Mike, I didn’t realize that as a physician, that that strategic persuasion, the ability to influence others, was really as important as I’ve learned from you. It really is.

You were telling me about an opportunity that you had to speak with other infectious disease physicians who were hand selected by a leadership Institute in that specialty. You were asked to come and speak to them about strategic persuasion, how to overcome conflict, etc. Let’s talk about that a little bit.

When you thought about doing that and as we talk about it and as you all out there are listening to this, you’re going to find, as I did, when you listen to Mike, he’s really the principles that he’s talking about, apply to. No matter what your role is, whether you are a leader already or you aspire to be a leader in a company, a small business.

Parents are leaders. You are leading your children in particular ways. Every role that we have at some point or another, we are influencing others and trying to persuade them to move in a particular direction. When you think about that, Mike, I found it interesting, the framework that you’ve developed to explain. How do you do that in a very strategic kind of systematic way? What are the steps?

Mike: First of all, let me say that I learned a lot of this. Penn is very good about developing leaders, particularly physician leaders. They send us to courses. I was sent to Harvard for a couple of weeks when I first started this social thing.

Patti: Then you also graduate from Harvard?

Mike: No, I graduated from Yale.

Patti: OK.

Mike: Be very careful.

Patti: Sorry about that, Mike.

Mike: [laughs]

Patti: Oh, boy, that was a full pop. I ever heard one.

Mike: That’s OK.

Patti: Yeah.

Mike: I learned some of this in courses, some of this obviously by reading. There’s a very interesting book called, “The Art of Woo,” W O O. Which means, “Winning Over Others.” That was published by, Shell and Moussa at Wharton. I was fortunate enough to hear Mario Moussa talk about this and read that book.

Some of this is their particular construct, which I have found very helpful over the years. The first thing to say about it is, persuasion is all about relationships. If you don’t have a relationship of any kind with a person that you’re trying to sell your ideas to or persuade, it’s very, very difficult.

They have to know you somehow through someone and know of you and know that people trust you or that people think that your ideas are good or whatever or it’s very difficult. The thing that people fail to understand is, you can have a great idea, but if you can’t get somebody else excited about it, it just sits there. It goes nowhere.

This is an important skill for leaders because when you’re in leadership positions, especially early on you’re often asking for resources of some kind. In medicine, it’s often, “I might need a nurse or a pharmacist or a secretary or an administrative assistant or someone to help me with whatever my idea is.”

You’re going to administration for this kind of resource. Resources are scarce, especially in hospitals. You need to do this well. The thing that I see most often is that people don’t prepare properly. There are steps that one can take about this. The first is making sure you establish a relationship.

If it’s not with the person who you need to persuade, ultimately it needs to be somebody else that can help you get to that person and get that person to know you. There are a number of steps that are very helpful.

We talk about surveying your situation, making sure that you understand what your goal is, what the data is you’re going to present, if there is data. What is your idea and what is your organizational challenge that would make this difficult maybe for you to sell?

Patti: Also, it’s important to understand what’s in it for them. Understand what their priorities are, what their interests are and really be empathetic to the challenges they are facing.

Mike: Absolutely. A lot of people don’t understand and I didn’t either till I became CEO. I knew what their interests were, but I didn’t understand all the challenges there were about getting to those things. Shared interest is an absolute key thing because hospital administrators for example, are very interested in patients getting good care too.

The issue is how do you share that interest in a way that works. Preparing is really important. Then, it’s who do you speak to and in what order? As a young physician, you’re not necessarily going to walk into the CEO of a hospital or as a young worker in any profession, walking into the CEO and saying, “Guess what? I would like this or that.”

It’s often a step wise fashion. Who do you go to first? Who do you go to second? How do you do this to get to the decision maker ultimately? Then you need to understand what are you bringing to the table. Because you may have your own biases that you need to make sure you understand so that you either mention those or don’t mention those, but you need to be aware of them.

Then you need to have a level of commitment yourself to your own ideas as well. You need to do all those things, but you really need to survey your situation. There are barriers you’re going to need to confront and so forth.

Patti: The barriers were interesting. Even understanding your own credibility, your own communication style, your belief systems, how they work with or against the person that you’re trying to influence in a positive way. I thought that the next step, the stepping stone strategy that you talk about is fascinating.

Let’s talk a little bit about that. It’s so often, as you said, you don’t necessarily go into the CEO to influence the CEO right away. You often have to work through other people. How does that work?

Mike: First is understanding your organization wherever you are. Who are the influencers? Who are the people that are likely to move your idea along in an effective way? For example, maybe it’s the chief financial officer. If there’s major financial implications and have you convinced the chief financial officer that this is something worth doing?

That goes a long way towards getting this. Because if the chief financial officer’s on your side with the CEO for example, that’s huge. It might be the chief of your department. It might be whoever you’re reporting to and so forth. In certain organizations you never want to go around the person you’re reporting to. Understanding all of those dynamics are really important.

Patti: Oh, yeah. The politics are really important. That person that you report to can squash it, right away if they feel you’ve worked around them. This also works not only internally, but externally as well. Whether you’re a sales person and you’re working with major enterprises. How do you get to the decision makers?

These are all really important concepts. Tell us that story. I think there’s a wonderful story. You talk about, The Elvis and Bono, whatever. Tell me about that.

Mike: Well, the rock star, Bono of the purple wrap around sunglasses that everybody knows. Who’s Irish. Who grew up in a very hard scrabbled way but who became, over time as he was more and more successful, a real social activist.

He got very involved in a number of things, especially at one point in the AIDS epidemic, especially in Africa. Where they didn’t have access to what we have access to in this country.

He wanted to persuade the United States Congress to forgive some African debt that they owed the United States in order for them to be able to divert that money instead to help with the AIDS epidemic.

Well, how is a rock star from Northern Ireland, or Ireland, going to do this? He found that the person who was head of the Appropriations Committee at the time was the Senator Jesse Helms, who would probably be the last person who would know who Bono was or like that kind of music.

He knew he had to get to somebody like him. He couldn’t just walk in front of Congress without his backing. He arranged to have another Congress person who was a friend introduce him to Helms and get a meeting with him. Of course, he prepared carefully.

He knew what his data was. He knew what his pitch was going to be. He knew how to do it. He also had a plan A and a plan B. Plan B was, he knew that Jesse Helms was a born again Christian. Bono happened to be a born again Christian at the time.

He wasn’t sure which tact he was going to take. He took the tack that he usually did, which is walking into the office introducing himself. Then explaining how severe this problem was. All the data about AIDS in Africa, the poor people, nobody had access to medications and so forth.

He saw Jesse Helms eyes glazing over at all the statistics. He switched tacts, and started to talk about how often the Bible talks about mercy and helping the poor, went through all the passages in the Bible that he prepared for this. By the end of the conversation as the story goes, Jesse Helms was crying and basically saying, “What can I do?”

Patti: Wow.

Mike: It went to Congress. Jesse Helms introduced this bill. It got passed and the money was there. What he learned was, this is concept of an Elvis, which is in The Art of Woo book is that Elvis was an extremely important influencer in the rock music world up from what came after Elvis.

It’s the influencer. It’s the person who can get you to what you need to get to, who isn’t themselves the decision maker. Bono found that person and was able to get this done in a very creative way.

Patti: What a great story, what a great example of someone who is literally leading from the heart, and just figured out a way to make it happen. Again, it’s just a perfect example of that, being prepared, and having Plan A and plan B, because you just don’t know what’s going to be effective. You’ve just got to be ready to figure out different approaches.

I also loved the idea of the pitch, in the PCAN model. The PCAN model is just so nice, because it’s concise. It’s when you’re making the pitch, you’re going to have…people don’t make these decisions are not impulse by.

Yet, they’ve got a lot of things that are being thrown at them. You only have a short period of time to make that impression and really get that ask out there. Let’s talk about what the PCAN model is all about.

Mike: The PCAN model the P C A N stands for, the P is the problem, you have to have a concise presentation of what the issue is, if it’s a problem. Whether it’s, we’re having trouble with selling something, we’re having trouble with antibiotic control, we’re having…Whatever the problem might be in a concise way.

You’re right, you need to be careful about not taking up too much time and being very prepared and concise with your argument. The C is what’s the cause of the problem. Explaining what you understand, why this is happening.

Then the A is your answer. What’s your answer or solution? And why is it better than somebody else’s? Then the N is the net benefit. What’s going to be the benefit of this idea taking hold?

Patti: It’s so interesting, Mike, I don’t know about you, but I find all too often people focus just on the problem. They’re not doing the preparation, they don’t understand why it’s occurring. They’re just circling and developing this agenda. This is just circling the problem instead of focusing on the solution.

I think that with all of us, if you can develop this model and really be concise about it. Identify what the problem is, why did it happen? Why is your solution, the best approach over and above all of the others, and what’s the win win for everybody involved?

Mike: In many situations, I can remember people coming into my office in any leadership position with, “We really have a problem.” I would say, “OK,” and they’d explain the problem. They had no, it was just presenting me the problem for me to solve, for me to deal with.

The best people I ever had work for me were people who came in with a problem, and then say, “This is what I really think the solution could be.” Whether I agreed with solution or not, I really respected the fact that they’ve thought through it that far.

Patti: You appreciate it. I know, I appreciate it too. I don’t know what the solutions are going to be in different areas. I’ve got portfolio management. I’m just speaking for my own, portfolio management, planning different areas, and they are the experts at their jobs.

If they have an issue that needs to be fixed, when they come to me, they already know, what are the potential alternative solutions, and give me give me a recommendation. It’s wonderful because we’ve developed this strategic approach internally. It works brilliantly. Things get solved quickly.

Mike: I would emphasize though, that all of this really depends upon how the person you’re trying to persuade looks at you. What do they think of you? Do you have credibility? Why do you have credibility? Do they trust your judgement about this? What’s your relationship with that person even if it’s indirect? Have they heard about you? Do they understand that when you say these things, there’s a lot of credibility there?

Those things are crucial. I mean, going in with a plan and a concise way of preaching when they have no idea who you are, is going to be a very difficult situation for you.

Patti: It’s a very interesting dilemma then for people who are relatively new. How do they establish their own credibility with those people, and I guess it gets to that stepping stone approach, right?

Mike: Partly. Also partly, I always tell young physicians this who think they may be interested in leadership. The first thing I say is, establish your credibility as a physician first. That’s the coin of the realm in medicine anyway. If people think of you as a good, talented, honest physician, that goes a long way. I think it’s true, and other things as well.

Do your job, do it well, develop a reputation. Then as you go along, these things will become obvious.

Patti: I also liked the last part where you’re talking about securing your commitments. It’s one thing for you to come with the solution and go through that PCAN, but at the end of the day, you’ve got to close the sale, for lack of better words. You’ve got to be able to get a commitment. People will, they’ll procrastinate. They will waffle, they’ll…it’s really important to get some action right away.

That shows that they’ve got the buy in. If they’re doing something right away, you’ve got some buy in and things can move along.

Mike: Correct.

Patti: Mike, we’ve talked about so many topics here. Let’s pull this together for everybody listening today. You’ve had a terrific career over time in leadership. You’ve mentored other leaders. If there was one quality that you would look for in a leader, what would that quality be?

Mike: The quality that I’ve seen in every good leader I’ve known, is that they’re trustworthy. People that are trustworthy, are fair. They’re empathetic. They develop long term personal relationships. They tell the truth. Sometimes telling the truth is not so easy.

Patti: There’s an important emphasis that you just put on that statement. You emphasized the word good leaders. There’s leaders, a lot of people have leadership positions, not all of them are good leaders. What you’ve just said is brilliant.

Mike: The other thing about good leaders is that they possess what’s called a high emotional intelligence quotient. People who are emotionally intelligent are self aware. They know who they are. They know what their good and bad points are, what their talents are, where they’re a little weaker. They self manage themselves very well. They don’t fly off the handle.

They know who they are and where they are. They’re very socially aware. They have a lot of social skills. The best story I ever heard about being socially aware, is a story I read about Walter Bettinger, who’s the head of Schwab.

Patti: Sure.

Mike: When he was in school taking a business course, the final exam which he thought he was totally prepared for ended up being a blank page of paper with one question being, “What’s the name of the woman who cleans this room?”

And here were a group of students, had been going in and out of this classroom several days a week for the entire course. For the entire semester, this woman apparently was there cleaning as they were walking in and saying “Hello.”

Some learned their name, I guess some didn’t and Walter Bettinger said he flunked that answer and he would never flunk that kind of a question again.

It just shows that there are people who really take the time to relate to everybody both the “important people” and the “less important people” and I think really good leaders have empathy all the way up and down the scale and understand who’s who and have to skill to be able to carry that off. I think that’s really an important skill.

Patti: I think it’s also a perfect example of recognizing that every human being is important. I think about our organization and everybody here serves such an important role to make all of this work and we’re a small business.

A huge hospital like Pennsylvania Hospital, The Government, everybody is important and to recognize that, embrace that and appreciate those people who make a difference when you’re walking into a classroom and it’s clean.

What a great example, what a great podcast this has been, Mike. Thank you so much for your time and for bringing to us the framework that you’ve used over your career so that other people can apply that in their own lives.

Thank you so much for joining us in today’s podcast. If you have any questions or are interested in other subjects, feel free to visit our website at keyfinancialinc.com.
Until next time, I’m Patti Brennan and I hope you have a fabulous day.

Ep25: Alzheimer’s Crisis in America – Is There Hope?

About This Episode

One in every two Americans, over age 85 has Alzheimer’s. What are the warning signs family members should be looking for? What progress has scientific research made and is there hope for a cure? Patti sits with Tim King, Chairperson for Corporate Sponsorship for the Alzheimer’s Association, to hear the latest on any medical advancements, and discusses the seven stages of this devasting disease.


Patti Brennan: Hey Folks, whether you have twenty dollars or twenty million, this show is for everyone who wants to protect, grow and use your assets to live your very best lives. I had an amazing conversation with Tim King from the Alzheimer’s Association and boy did he dispel a lot of those myths that are out there. I don’t know about you but I think when you’re done you’re gonna say wow, that was a really good twenty minutes. We’re gonna just cut right through it and get to the bottom line in terms of what this disease is all about, how people are being affected, what some of the warning signs might even be and most importantly where you can go to get help. This is a really devastating disease. As a financial advisor I gotta tell you we see the economic impact it has on the person, their family. We see the emotional impact and today we’re going to turn things around and say, OK, it’s happening, what are we going to do about it? And where can we go for help. So without further ado let me introduce you to Tim King. So Tim welcome to the show.

Tim King: Thank you, Patti.

Patti: Thank you so much for being here today.

Tim: Thank you for inviting me.

Patti: Tell me Tim, how did you get involved with the Alzheimer’s Association?

Tim: Like many of us, I was on the front lines. My mom got diagnosed with Alzheimer’s roughly in 1995. She passed in 2004. I saw the whole progression and could see what it did to a family and see what it did to a relationship and so on.

That’s one of the nice things about the Association. Most people who are working at the Association have that background. They’ve dealt with a parent, they’ve dealt with a grandparent that has suffered from the disease or is suffering from the disease.

Patti: And they really, really, truly understand, don’t you?

Tim: That’s correct. I mean, when this first happened to our family I actually did call the 800 hotline because I knew we were in over our heads. We had an extra layer of a problem. My parents were actually in California and I was the closest relative, and here I am in Pennsylvania.

So, just get the lay of the land as far as possible healthcare units that she could go to, homes and things of that nature. Or bring healthcare into the home, so I had a lot of questions. They were very helpful in helping me out as I went along.

Patti: I’m thinking about that and you might have been going through. Folks, when we think about Alzheimer’s, Alzheimer’s is not one of those things that you take a test and then you’re diagnosed. It is actually broken up into seven stages of the disease. It’s a progressive disease, it always gets worse. If you think about it in terms of a Broadway show, you’ve got Act 1 where there’s no symptoms, very mild symptoms.

Maybe people just think, “Oh well, you’re having a bad day,” or something like that. And then in Act 2, stages 1, 2, and 3, very mild, etc. Act 2 you get in that early stage dementia. This is where the diagnosis often occurs. There’s mild cognitive decline, etc. In that stage, I was interested to learn about this, Tim. Act 2 can last for three or four years.

Tim: Easily.

Patti: Oh, jeez.

Tim: Then you get into the really severe stuff, Act 3, where you’ve got severe cognitive decline, physical involvement, lot of times people are not able to even carry on their activities of daily living. You’ve got to bring somebody into the home or have them go somewhere where they will get the care.

And that was one of the biggest challenges because at the beginning, my father was like, “I have this. I can handle this,” but then it just started getting worse. When your mom is getting out of the house and going down to a gas station for ice cream cone thinking it’s 1956, reality sets in.

Patti: That must been so hard for your dad.

Tim: Yeah. It was very difficult.

Patti: The denial is part of this whole process because nobody wants to believe that that’s really happening to somebody that they’ve been married to for 30, 35 years.

Tim: Yeah. Names are forgotten. 30 plus years of marriage is pretty much out the window. We’re spending as a country unpaid care roughly $18 billion a year.

Patti: Wow.

Tim: You see it on your side, I mean, budgets can get stretched pretty fast in those situations.

Patti: Yeah, exactly. It’s not just the emotional toil it takes, it’s the financial toil as well. It’s really a really big issue. Have you seen many changes since your mom passed away with Alzheimer’s. She passed away 14 years ago, right?

Tim: True.

Patti: What did you notice or what’s changed if anything?

Tim: There is some good news. The trend seems to be slowing down and that’s because people are working longer. They’re staying more active. They’re staying more engaged.

That is something good. People are retiring a lot differently than they retire 25 years ago.

Patti: That’s interesting. Let’s talk about that for a minute. There’s been a correlation that has been made between the onsite of Alzheimer’s. We should also differentiate between early onset and the one that we all think about, worry about. Early onset tends to be much quicker, more progressive and debilitating, although it’s debilitating for everybody.

It is interesting that they’re beginning to see that connection between the engagement. Whether it be social or through work or what have you and the delay of the symptoms if you will.

Tim: You had a speaker on a couple months ago and he was saying, talking about retirement, talking about aging, who are you going to have lunch with. Looking back and connecting the dots with my mom, she got secluded from where she was. She just was not around family. Next thing you know, being in a house by yourself 24 hours a day can start to play games on you.

I think the brain is like a muscle. The more you use it, the better it is. One good thing about maybe social media like Facebook and things of that nature, Skype is you can stay in tuned with what’s going around with your grand kids and so on. We didn’t have that back in the early ‘90s.

Patti: That’s really a good point also. She was in California and you were trying to figure out what was going on based on phone calls, right?

Tim: Exactly.

Patti: Wow. That’s tough stuff.

Tim: Yeah.

Patti: That is really interesting, so there is some hope. Tell me more about the hope part? I’m a hopeful person. I’m a domestic person. Let’s talk about the pharmaceutical side of things.

Tim: We’re trying. I mean, the pharmaceutical is trying. We thought we were going to have some success this past spring. Biogen unfortunately couldn’t get their drug to market.

A lot of the pharmaceuticals have backed down. There’s a lot of money being spent here, a lot of opportunity cost. If I spent a billion dollars and I strike out on a drug, that’s money that could have spent some other way.

What I’m more excited about is that the medical community as well as the technology community might be getting together here because I think that the chances of a cure outside the pharmacy is very likely with neurotechnology, artificial intelligence, and so on.

I wouldn’t be surprised if we get something from that nature. More from a scientist or a tech guru than actually a doctor.

Patti: We got an Elon Musk who’s going to solve the problem, solve the issue of Alzheimer’s maybe before Pfizer or one of the other big companies.

Tim: Yeah. Very possible. We know more about space than we know about the human brain.

Patti: I’m so glad you brought that up, Tim. When you told me about that, I thought, “Wow. That’s a really interesting comparison.” I decided to do a little bit of research.

Listen to this one, “In 2016, our government, we spent $19 billion on research, on space program versus $1.8 billion on Alzheimer’s research.” How is that for a disconnect, right?

Let’s round off the numbers, $2 billion versus $18. Think about the implications. How many people listening today really see themselves going into space? Yet, how many people do we know that are being affected by Alzheimer’s?

Tim: True.

Patti: What are we thinking? Where is this money actually going and where should it really go? The other thing about it is when I think about the longer term implications in terms of our programs, Medicare, Medicaid, things of that nature, just Alzheimer’s alone, you mentioned unpaid caregivers. What about the cost of taking care of people with Alzheimer’s?

In 2019, it is expected to cost Medicare or Medicaid $277 billion in one year. Folks, let’s look at this, $2 billion versus $18 billion versus $277 billion. Should we be a little bit smarter about where we spend our taxpayer money?

Tim: Yeah. We have 10,000 Baby Boomers who are turning 70 today. Today one out of every two 85 year olds has Alzheimer’s. The numbers that we’re looking at maybe for a new generation 25 years out is not going to be six million anymore that we’re dealing with today. It’s probably going to be three times that.

The numbers we’re throwing out as far as cost is going to be closer to a trillion dollars. Where do we start? When do we start? This time is better than probably any other time.

Patti: How’s 20 years ago? Can we go back and just take a mulligan here with the way that we’re spending this money because boy, can you imagine if we really focused on this disease as much as it needs?

Tim: And not just here in the states, think China, think all around the world.

Patti: I was going to ask you that, Tim. I don’t know. Now again, I know you’re a volunteer for the Alzheimer’s association but is there a difference between different nations? Do we have more Alzheimer’s than say people in Japan or people in India?

Is there a correlation? I don’t know if you know.

Tim: I don’t know that answer. I know it’s affecting pretty much every country around the world. Maybe in Japan it might be a little bit more because their demographics skew a little bit towards the older. I don’t know off the top of my head but that might be something to look into.

Patti: Yeah. That might be something for the show notes. Just because I’d be curious because what we eat here in the US versus what people in Japan and their diet, it’s very different. They’ve got rice and fish being their main sources versus here. We got a lot of the junk food.

Tim: There was a story I read in “Fortune” back actually this past February. There was this scientist who went to Guam. For some reason, this indigenous community in Guam had a high level of Alzheimer’s. He looked at their diet and what they find is that a delicacy over there is a bat. I don’t know what the name of the bat.

Patti: Oh, wow.

Tim: They were able to make a connection between a protein in that bat to the people who are getting Alzheimer’s. Now, they’ve taken that protein out and they’ve studying it a little bit more now.

We’re still in the second, third inning but this is outside the box type of research we’re seeing now. The technology, the diet. All the things that we’ve been doing the previous 50 plus years really hasn’t been working.

Patti: Wow. That is really, really interesting. I know that for me, we talk about this all of the time with our clients because it’s a big part of their overall planning, right? They always say their biggest fear is losing their memory. Being on the frontlines as you were, what else was going on? What did you notice and how did it…

Tim: I’ll share a story with you. My mother got diagnosed with Alzheimer’s, my father got diagnosed with cancer about two years apart. I remember going around and sharing stories with people, “My dad has cancer and so on.” People would always react like, “Oh, is he getting a surgery, radiation, chemo?” Everyone had a suggestion or idea.

When I told people my mom had Alzheimer’s, the lights just went out. There was no reaction. We don’t know anyone who has survived Alzheimer’s and that’s the unfortunate thing.

There’s no real survivors of Alzheimer’s. I remember sharing that story with my doctor and he’s like, “When you get diagnosed with Alzheimer’s it’s already too late.” That’s kind of where the disease is at.

Another thing I’m excited about too, if we were to find a success with Alzheimer’s, more than likely, that’s also ALS, Parkinson’s and so on because they kind of all swim in the same waters.

Patti: Boy, that’s a really interesting point. How’s that for an incentive? Think about the research that would uncover in terms of how our brains work. There’s now a new point for mindfulness and meditation and creating that space in your brain. It was fascinating.

Having a podcast, I now listen to everybody else’s podcast because I want to get better at doing podcast. I was listening to one by David Allen and it was fascinating because he’s a guru in terms of productivity.

He said something that was really profound. He said, “You know our brains were made for creating ideas, not for holding them.”

He said that, “Cognitive science has now proven that we can only hold four things in our brains at any given time in terms of working on and thinking about it, etc.” Yet, I speak for myself, I’m always thinking about this and that, and all these random thoughts are coming into my head all of the time.

Just to take a few minutes, just take a deep breath and clear all that stuff out, and I find that I’m much more focused. I’m much more present and I’m much more effective. I thought that was kind of woo, woo, woo. Five years ago I never would’ve taken a couple minutes, closed my eyes in the middle of the day and I find myself doing it more and more often and finding it very helpful.

That’s just something that people are just becoming more comfortable with. I don’t know that there’s any “research” that talks about meditation and mindfulness and yet so many people that are finding the benefits of that. Think about what the research could do in terms of what the brain and what’s happening as we clear out those cobwebs.

Tim: I think you are on to something. High blood pressure, stress, all attribute to brain function. Let’s face it. We’re distracted all day long with cellphones and computers and email and what have you. Taking that time away like a TV timeout to reset your day is not a bad idea.

I didn’t know the statistic though. You can only hold four things so I don’t feel too bad when I forget the laundry detergent, [laughs] when I go shopping or something of that nature.

Patti: Absolutely and I will tell you. Again, David Allen is a productivity guru. I will tell you, I took a class from him when I was in my 20s and he talked about doing a brain dump. I find myself doing this so much now. Every once in a while when I get swamped, overwhelmed, I got too much to do, etc., I will literally take a piece of paper and I will just start writing.

I will write, write, write, write, write everything that comes into my mind. Everything that comes in. It’s called a brain dump. Then when you look at it, you think, “What in the world am I doing?”

You just pull out those things you think, “OK, this is what I need to focus on and get rid of the rest.” It’s just those tools I found for me have been so good over the course of my life.

It doesn’t mean that I’m not going to get Alzheimer’s. Pray to God I don’t, but again, it’s these things that for me, they’ve helped. Wouldn’t that be interesting to see…

Tim: There has been some research. My wife teaches at a local adult community. She teaches French – her sales pitch to the organization was that older folks who engage in a second language tend to ward off things like dementia and forgetfulness and things of that nature. Musical instruments, same thing. Learning something about nature. Again, just trying to keep the brain active.

Patti: It’s interesting when Jack, my son, had a traumatic brain injury…Those of you who’ve been listening to these podcast know that my, at the time, 17 year old had a traumatic brain injury and two hemorrhages in his brain, was on a ventilator. By the way, he’s doing great. Thank God.

Although he has no sense of smell but that’s the only residual effect of his brain injury. What’s also interesting because everybody always ask us, “Oh that’s such a shame to have a 17 year old boy who can’t taste anything. That must be a bummer.”

His taste is fine. I learned that the nerve that deals with our sense of smell, it actually forks off and that’s why many people lose their sense of taste when they lose their sense of smell. Fortunately, wherever his injury happened in his brain, he loves McDonald’s still so there you go. It’s just a perfect example of how little we know as we discover.

As we get back to Alzheimer’s, what’s so great about the association is the material that you can get. It was fascinating to go through some of the things that you were telling me, Tim. The ten warning signs that this might be happening, tell us more about that.

Tim: Some people may overreact. Just because someone’s having a bad day doesn’t mean they have Alzheimer’s. It could be dehydration. They could be on a new medication.

Maybe they just didn’t get enough sleep. We talk about those types of things. We talk about the support group that we offer. We talk about what areas you can go to get more information.

Not only do we have a great website but we have people on call 24/7 at the Alzheimer’s organization. We have chapters all, not only in States. They’re drilled down right into counties, communities and so on.

Patti: You literally have people 24/7 that people can call?

Tim: Correct.

Patti: That’s amazing. These are all volunteers?

Tim: All volunteers, and all know what you’re going through.

Patti: Wow. That’s amazing.

Tim: No matter what stage it’s at.

Patti: Boy. Do you get a lot of people that Alzheimer’s that are calling the association?

Tim: I can’t remember.

Patti: That is great, Tim. Let’s boil this down and get into some action items. Number one, what I heard from you Tim is that not everybody is going to get Alzheimer’s, right? So let’s not get too overly paranoid about this.

Make sure that you’re drinking enough water, that you know the side effects of your meds, that you’re getting enough sleep. Stay socially active, stay engaged as much as you possibly can.

Second thing that I heard was watch out for the miss. There are lot of miss out there that unfortunately there’s no secret cure.

You can’t take this pill or do this thing that’s going to cure you. Right now, there isn’t a cure for Alzheimer’s.

Tim: There are suggestions. I eat blueberries every day.

Patti: There you go.

Tim: So there are little things like that. There’s something in blueberries that maybe has something to do with helping you ward off Alzheimer’s or dementia. There’s a lot of supplements out there that put themselves out there for…and there’s really nothing FDA approved.

Like I’ve said, we really haven’t had a blockbuster moment. I was reading about the history of the heart. After Franklin Delano Roosevelt passed away, this country made a huge initiative to cure heart disease.

In 25 years, we had artificial hearts, replacing valves, all new types of surgeries. We came a long way. There were very common for someone who was in the 40s to have a heart attack back in the 1940s and 1950s.

We just haven’t had that moment. I thought maybe back in the ‘90s when Ronald Reagan went through it. You always need a face of a disease.

Patti: Yeah.

Tim: Michael J. Fox and what he’s going through and so on. It did wake some folks up but the challenge so far has been too great for what we’re trying to do.

Patti: Yeah, it seems like to your point that it’s bigger than one company can deal with. Again, it takes a government, it takes the world working together.

Tim: The brain is such a complex place. It’s hard to get to.

Patti: Yeah.

Tim: You could take a heart out of somebody’s body and the person could stay alive. You really can’t do that with the brain.

Patti: Boy, that is the truth. That is the truth.

Tim: Yeah.

Patti: There’s nothing that you know of, there’s nothing that people can do aside from the blueberry thing. There’s no downside to eating blueberries, right?

Tim: No.

Patti: There’s no cures out there, etc. The most important thing…as a side bar, we had a conversation about Google, for example. Google just had an initiative where they’re removing ads that are completely misleading where there’s absolutely no proof or FDA back up.

I thought that was a pretty, pretty big statement for an organization like Google because a lot of people in America are spending millions of dollars on potential cures or things to do to prevent Alzheimer’s and there’s no proof.

Tim: Go to your doctor. Get a cognitive test. That way, even if you’re a hundred percent fine, you have a baseline. You go back to next year, all of a sudden they may notice something. That’s what where you work too is sometimes you have to be the adult in the room.

The family may not pick up, the family might be in denial. All of a sudden you’re seeing suspicious things with the checkbook and the accounts and so on. Often times, the financial adviser might be the first one to say, “Hey, we have a problem here.” Now you have to be careful with that because they might just be having a bad day.

Patti: That’s exactly right.

Tim: You have to balance that out. You’ve been working with clients for 20 years, I’m sure you can pick up on some signs.

Patti: You betcha. You know what, we actually have a form that we have every client fill out that gives us a go to person in the event that we have a concern. We wouldn’t share any personal information, things of that nature but just to check in with the family member. Again, if something were to ever happen.

Again, not everybody’s going to have Alzheimer’s. We talked about the miss. How can people get involved, Tim? How can people learn more about Alzheimer’s and what actually is working?

Tim: Sure. There’s the website, alz.org. Like I said, there are local chapter all around here in Pennsylvania, Delaware chapter. There’s a chapter on Berks County. There’s a chapter out in the Harrisburg area. They’re all around.

November 10th, we’re doing our walk at Citizen’s Bank Park. We’re expecting 13,000 walkers. Historically, we’ve been one of the biggest walks in the country.

We raise over a million dollars. We have a hundred corporations. That’s one of the reasons I’m here is that as the chair person for corporate fundraising.

If you’re listening out there and like to get your company involved, I would love to talk to you about the opportunity. Even if you can’t do a corporate sponsorship, we’re still looking for volunteers.

We’re looking for walkers. We love to work with you in getting your logo out, getting your firms name out into our distribution list and just getting more in trench in the community.

Patti: What a wonderful message to send out to all of your employees and the people that do business with your company to say, “Hey. We’re people too.” People sometimes forget big corporations, corporations are people.

To have that face and say, “Hey. We understand because we’ve got people in our own ranks who have been dealing with Alzheimer’s and we’re doing everything that we can to help them and you from a corporate responsibility perspective.”

Talk about great PR and a great message that your company can send out to the world.

Tim: Companies are always trying to make that emotional connection. You look at some of the most highly rated companies and they accomplished that. Right here, to be in your backyard on a beautiful Sunday morning, this could be an easy one for you.

Patti: Just to pull this all together, we think about the number of people that are affected. In 2019, we are talking about almost six million people living with Alzheimer’s today. That’s a lot of people and more importantly, the domino effect because it’s not just that person, it is their family as well.

Tim: Yeah. Totally. That’s why we always say it’s a third of third of third. There are a third of people who are dealing with it. There are a third of people who have dealt with it.

There’s going to be a third of people that will deal with it. At some point of your life here, it’s going to be very hard to avoid having to confront this. That’s why you know, one reason of why I’m getting involved.

Patti: Tim King, thank you so much for getting involved. Thank you for being that person, volunteering your time. You’re a brilliant man. You could be doing a lot of things. I for one am so grateful that you’re devoting your intellectual capital and your time to this terrible disease.

Tim: Well Patti, we appreciate Key Financial helping us out this year. I guess they were going to paint the town purple at the weekend of the walk. Like I said, if anybody’s out there who wants to get involved, we have the alz.org and then the phone number is 1-800-272-3900.

Patti: I didn’t ask you. Where is the walk going to be?

Tim: Citizen’s Bank Park.

Patti: OK. Got it.

Tim: And the Eagles are not playing.

Patti: Yeah. Go Eagles.

Tim: It’s a buy week. We’re not that crazy.

Patti: Yeah. Outstanding.

Folks, thank you so much for joining us today. Again, Tim, thank you so much for joining us. If you have any questions, feel free to visit the website.

I think Tim’s given an even better resource of what the Alzheimer’s resource is there. Until next time, I am Patti Brennan. Thanks again for joining us today.

Ep24: Life or Death Emergency Preparedness – What to Grab?

About This Episode

If authorities knocked on your door and gave you only 30 minutes to evacuate – what would you take? In the aftermath of Hurricane Dorian, Patti Brennan surveys four of her team members to discuss what they would grab for their families. Find out what an Army Ranger would take compared to another team member may think is vital. Patti rounds out the discussion reminding listeners what should be a priority on their “financial grab n’ go”.


Patti Brennan: Hi folks. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you to want to protect, grow, and use your assets to live your very best lives.

You might be wondering, what’s this about emergency preparedness? What kind of a show is that, and what are you going to be talking about then? It occurred to me with the fact that we’re going into hurricane season, Dorian basically, fortunately, wasn’t as destructive as was originally feared.

Let’s face it, there are lots of things that can happen that can create this need or an opportunity – funny, funny, all right – where somebody’s knocking on your door and says, “OK, you have 30 minutes to get out of Dodge.” My question is what are you going to grab?

Joining me today, I have four of my teammates. These are my key teammates. We’ve got Eric Fuhrman. Eric, we call him the professor. What would the professor grab? Versus Jennifer Meehan. Jennifer Meehan is a mother of 4, and actually the mother of 25 here at Key Financial.

Then we have the Army captain, we’ve got the ranger, Kristopher Thompson. He is ready for anything, right? Last but not least, we have Michael Brennan. Michael is a newlywed. He’s got a brand new house, and let me be the first to announce, I’m going to be a grandmother, with a baby on the way. What does Michael grab? Oh, we’re all clapping.

Eric Fuhrman: Yay, hooray.

Patti: Oh, happy day. All right, there we go.

Kris Thompson: Good job.

Patti: All four, different situations. You’ve got an emergency. What are you going to do? What are you going to grab? Give me the top three things that you, the professor, would grab if you…And by the way, for all of you, assume that your family’s safe. Your animals are safe, so I’m talking about stuff. What stuff are you going to grab?

Eric: I guess that’s kind of interesting, Patti. Given that you’ve given the introductions, there’s one member here that’s probably uniquely qualified in survival skills, Captain Thompson. I would probably leave my house and find out where he is as fast as possible, and then just follow him.

Patti: Eric, you know what? I’ve got to tell you, that reminds me of Y2K.

Eric: That’s right.

Patti: For those of you who are like me and had to live through Y2K, all the hype and everything, and the world was about to end.

My very best friend in the world is a neighbor. She’s one of these people, she was believing everything. “This is it.” She literally had a bunker. She had cans all over the place. Her whole basement was water and cans, you name it.

I would tease her about it and say, “You know what, Mary? I’m so glad you have a bunker, because at least I know where I’m going to go.” You know what her response was? “Nope, it’s for my family only.”

“You’re not allowed in.”

Michael Brennan: 42, but you get the picture.

Eric: Oh, jeez.

Patti: I’m like, “Oh, some best friend you are.” She was perfectly honest, too. She was not letting anybody else in.

Eric: Gee, whiz.

Patti: Emergencies happen, things of that nature. We’ve got Christopher. I’ll be fascinated to hear what he would grab.

Eric: He’s been playing it close to the vest over the last couple of days. He hasn’t really said anything, so me, too.

Patti: You guys who are listening, I gave these four wonderful people this topic, and I said, “I want you to think about what you would grab.” We had them immediately write it down, so they couldn’t think about it too long. It was fascinating to review these lists. Eric, top three.

Eric: I guess the threat itself is somewhat nebulous here. Me, the analytical mind, I would always try and think, “What’s the threat, and what’s the best thing to take, given the threat?”

Since we’re just kind of doing this open ended here, I think for me, I’d have to assume whatever the threat is that the likelihood is that modern conveniences, say our system of payments, supply chains would be disrupted.

For me, when I think about top three, if we have to get out of Dodge fast, the first thing would probably be cash because payment systems would be down. I’m assuming it wouldn’t be a crisis where the currency wouldn’t still have value, so I would take cash with me so you could pay things. What if you can’t do it electronically?

I think the next thing is probably water.

Patti: Wait, before we go to the water. How much cash would you grab?

Eric: That’s a great follow up question. The reality is I’m a plastic guy. My wife is a cash person, so whatever is in her purse, because she’s the one that has all the cash in the house.

Patti: Got it, OK. Fair enough, sounds good.

Eric: Hopefully, that’s a lot. I’ll just pray that she went to the ATM the day before. Basically, cash would be the first thing.

I think, again, you’d have to assume supply chains would be disrupted, so any kind of fresh goods or things like that, so having things like bottled water, lets’ say, a can opener, because there wouldn’t be fresh food, but a lot of canned food.

I think the final thing, just because I’m a dad with two young boys, is probably bringing a couple of story books. At nighttime, we always do a bedtime story, so to keep them calm, keep them thinking that everything’s cool, every night I could read them a story wherever we might be, even if the conditions aren’t great.

It would kind of make them feel like things were normal, and hopefully we’d make it through until whenever the threat was over.

Patti: I am throwing you under the bus right now, Eric.

Eric: Great.

Patti: I am looking at your list. Folks, on Eric’s list, five items. One of them he didn’t disclose to us, but it happens to be toilet paper. OK, Eric, come clean. Why in the world did you have toilet paper on your list? Give me your logic, because you’re a very logical person, so this one, I was really stretching here.

Eric: I thought that one didn’t need any explanation. Toilet paper kind of sounds self explanatory. Again, we don’t know how long the crisis is going to last, but toilet paper is an essential thing you need…

Patti: I’m sorry. This vision of you running down the street with bottles of water and toilet paper is just something I can’t get out of my head.

Eric: Right, but also think about it. The crisis, how bad could it be? Toilet paper is something that probably has a lot of value if we had to barter it for something else.

Patti: That’s when the cash doesn’t work anymore, right?

Eric: Or I’m out of cash, and now someone’d probably value toilet paper in exchange for, I don’t know, a sweatshirt or something like that.

Patti: All right, Eric, step away.

Eric: Something I could trade.

Patti: Step away. Step away from the mic. Oh my goodness. All right, Jennifer, you are next. This is our mother of four. So, Jen, what would you grab? What are the three things that come to your mind?

Jennifer Meehan: The top thing would be a first aid kit.

Patti: Because you’re a mom.

Jennifer: I’m a mom. I don’t know how long the crisis is going to last, and I want to make sure that I have antiseptics, anything that’s going to take care of my family.

Secondly, it would absolutely be water and food that can sustain us for a period of time. Lastly would be my fireproof safe.

Patti: Again, I’m throwing everybody under the bus. You say “my fireproof safe.” Jen, let me ask you this, “Do you have a fireproof safe?”

Jennifer: I do not.

Patti: What are you going to be doing?

Jennifer: I’m going to Home Depot tonight and purchasing a fireproof case, [laughs] or a safe.

Patti: There you go. Full disclosure, I will meet you there.

I don’t have one either. Actually, I do have one. It’s just so jammed with stuff, I can’t close the darned thing. It is completely ridiculous. It’s not going to help us at all. Fireproof safe, excellent.

The food and the water doesn’t surprise me, and also the first aid kit doesn’t surprise me, either. Knowing you, knowing that you’re always thinking about your kids, etc., it makes perfect sense. That’s terrific.

OK, Captain, you’re up. Captain Thompson.

Kris: How’s it going, Patti?

Patti: I’m doing great. How are you doing, Captain?

Kris: I’m doing well. I kind of ran through this list pretty quickly, just bouncing it off of some recent memories of my time in the army.

First and foremost was going to be water, whether it’s in actual H2O form in bottles, or whatever, or a LifeStraw. It’s kind of a very cheap, inexpensive filter that you can buy, and you can stick it in the river and suck water right out of the river, and it’s…

Patti: You’re kidding?

Kris: Yeah, it’s very cheap and very small, so I would definitely bring that and cases of water.

Patti: Jen, when we’re at Home Depot tonight, let’s get the LifeStraw, too.

Jennifer: Got it.

Eric: That sounds like a…

Kris: LifeStraw should be contacting you about their royalties any time.

Patti: Wait, wait, wait. Eric, what are you saying over there?

Eric: He is not a paid spokesman for LifeStraw.

Patti: Right, OK. All right, there you go.

Kris: Yeah, absolutely. [laughs]

The second thing I would bring is a first aid kit. A few things in there, bandages with gauze, a tourniquet, and I’ve got a couple of those on hand.

QuikClot, which is something that if you’re hemorrhaging, you sprinkle it in there, and it will stop the hemorrhaging. A splint, scissors, things like Amoxicillin, so if you get an infection of any sort, that would help, and alcohol.

Patti: I would think with the Amoxicillin, you’ve got to make sure that you check your first aid kit from time to time and make sure it hasn’t expired, right?

Kris: Yeah, which very likely mine has. [laughs] Most likely.

Patti: We hope, we hope they expire, right?

Kris: Absolutely. Iodine tablets would also be helpful in the first aid kit, and it would help with your water cleaning.
The last thing I’d bring would be a protection for myself and for my wife.

Patti: That’s interesting. Are you talking about a condom?

Kris: No, I meant more in the…

Patti: You’d bring condoms in an emergency? So that’s what my team thinks about.

Kris: Yeah. We’re in an emergency, so you might as well make the best of it. No, I’m just kidding.

I would actually, in the form of self defense. That’s kind of what I was going for. People are in dire times, and they’re going to make foolish decisions, and I want to make sure my family’s safe.

Patti: I wouldn’t be surprised. My best friend had some protection to prevent us from going into her bunker.

Kris: There you go.

Patti: There you go. Exactly, a perfect example. That’s interesting. That would be one of the top three things that you would grab. It just goes to show you how different people think. Obviously, you’ve seen a lot of things in your lifetime, in your young lifetime. That’s fascinating.

Kris: I don’t necessarily recommend that everyone do that if they’re not properly trained to do so, but I happen to be, so I think it would be good for me.

Patti: Very good. I appreciate that disclaimer, that disclosure.

Kris: Absolutely.

Patti: You’ve got to protect the people who are listening.

Kris: Absolutely.

Patti: From frankly, not only other people, but from themselves, right?

Kris: Yeah, absolutely.

Patti: Thank you. Now our newlywed, our soon to be father, new homeowner, what three things are you going to grab?

Michael: Yes, thank you. Thank you for having me, Patti. I’m glad that this is just a hypothetical situation today.

Believe it or not – you may remember this – this actually has happened to me in real life a couple of years ago.

It was Hurricane Sandy. The Coast Guard came knocking to the beach house. We were down at the beach. They said, “Kids, you have a half an hour to an hour to get your stuff and get out of this house.”

Patti: I forgot about that, Michael.

Michael: Yeah, you were not happy. I was planning on bunkering down, hanging out with buddies, and having a hurricane party, to be perfectly honest.

Patti: Yes, I do remember.

Michael: They came knocking on the door and said, “You guys have to leave. If you want to, you can refuse, but please know if you refuse, you have to follow these instructions.

“Please write your Social Security number in permanent marker on your left forearm. That way when we find your bodies, we won’t have to go through…It won’t be a nasty process of identifying you to your family.”

Patti: Wow.

Michael: That sunk in a little bit. That, in combination with you screaming at me, I got in the car and left.

Patti: Yes, thank goodness that one time in my life, the screaming actually worked.

Michael: Yes. Not always, but this time it did. Anyway, my top three. I would also grab my fire safe lockbox. In that, I have my whole ICE binder, my in case of emergency binder, when I die instructions for Kalie to have.

That firebox has a lot of good stuff in there, all my documents and what happens, what we do, how to handle the finances, who to call, and all that good stuff. Also in there is cash. I have actually vacuum sealed some cash. [laughs]

Patti: Are you kidding me?

Michael: I don’t know if we’re dealing with zombies, floods, fires, or what, but it is cash. We collect it from time to time, and I undo it and then re vacuum seal it.

Patti: These things I am learning about my son.

Michael: Yes. I stole your husband’s vacuum sealer, when he goes fishing, and I now use it to wrap money in.

Patti: So that’s where it is, huh?

Michael: Yeah. Yes, exactly. The last thing, I have all of my important documents, pictures, all that good stuff. It’s all on zip drives. It’s all backed up onto my Google Drive account. In my in case of emergency list of things for Kalie, when I die thing, there is exact instructions on what to do, who to call, all that good stuff, so I’m good there.

I guess the last thing I would have to grab is Delaney, is our six year old. I would have to grab her baby, her toy. Similar to Eric, it calms her down. She can’t sleep without it.

Those are the top three things. That probably shows you a little bit about myself. I don’t have any protection. However, I have gold coins, and I have cash, so I’m going to be…I know my strengths, and I know my weaknesses. Guns and that type of…That’s just not my forte, so Kris, I’ll be trying to buy you off.

Patti: Right, there you go. Everybody, that was terrific. You’ve given me your top three things. Now I want you to look at your lists, go down and look at the things that you put on your list, and tell me…

Jen was the first one. She’s the only one that came clean and said, “OK, I don’t really have the fire box.” What things did you not mention that you may or may not have, but you wish you had? Somebody come up with an idea.

Michael: I guess first and foremost – and this would just go to show how long I’d survive in a storm – I wish I had a helicopter to get the hell out of there. [laughs]

Patti: Now we’ve got to be real, right? That’s a good one, there you go.

Michael: Maybe that’s not the best. Also, in Sandy, I thought it would be a good idea just to be able to hop on a boat and get out of there. Apparently being on a boat in a hurricane isn’t the best of ideas.

Kris: Unless it’s a cruise ship, I guess.

Patti: Right, there you go. That sounds good.

Kris: Or an aircraft carrier. That’s not too bad.

Patti: Eric, let’s go to your list. It’s interesting, because you didn’t say the one that I thought was a great idea, and that was a can opener.

Eric: I think I mentioned it kind of in passing, but yeah, canned food or a can opener, again, I’m assuming supply chains would be disrupted so any kind of fresh food would…You’d be basically pretty much stuck with canned food, so a can opener would be really valuable. Other thing I didn’t mention would probably be a Zippo lighter, because those things never blow out in the wind.

Patti: That’s a really good one.

Eric: Having some source of fire would be ideal. Basic things like a flashlight and so forth, but definitely something like that I think wouldn’t be a bad idea, blankets.

Patti: That sounds good. Jen, you added something on your list that I thought was interesting, and that’s pictures, photos.

Jennifer: Yes.

Patti: Just for the memories, right?

Jennifer: Just for the memories, to get us through.

Patti: You can’t get that back.

Jennifer: If you’re not surviving or trying to survive for days, you need something to get you through those days.

Patti: Jen, you bring a unique perspective, because when you were a child, your family, your house, had a fire. Tell me more about what happened then. What did your parents do?

Jennifer: My dad was actually very quick on his feet.

Patti: How old were you, first?

Jennifer: I was in 4th grade.

Patti: You were in 4th grade.

Jennifer: I was at the end of my 4th grade. My sister and I were playing outside. My sister noticed smoke coming out of our bedroom. We shared a bedroom. She thought smoke was coming out, and I said, “Oh no, that’s Mr. So and so grilling.” Within five seconds, it was up in flames.

Immediately, the whole second floor was on fire. Ran in to get my dad, who was watching the Phillies, and he found my younger brother, who we didn’t know where he was. He was quickly able to get to all his files, which were right next to his bed, and make sure we were all safe.

Patti: Wow. That’s probably had quite the impact on you.

Jennifer: It did.

Patti: Now I understand where you’re coming from in terms of you’re going to, again, once the kids are safe, you grab that stuff, you get out, right?

Jennifer: Yep.

Patti: Captain, how about you? What didn’t you tell us about that you think this would probably be really important, too?

Kris: I would say the vast majority of my list, I do have on hand. I think the most important thing that I am not really taking into account is the fact that I don’t have it all consolidated. I don’t know that I could necessarily…

I think given some great teamwork from my wife, Sarah and I scrambling to get these things, we could get it up maybe in 30 minutes, but to be honest, I think the most difficult part about my list is I don’t know where all this stuff is in my house. It’s there somewhere. I think it’s important to have that stuff in line and prepared for the worst case.

Patti: Now I have to ask you this thing, because this is been killing me since I read this list. What’s with the parachute cord? What are you going to want with a…You’re not parachuting somewhere, are you?

Kris: Highly versatile stuff there, Patti. You could do a lot with parachute cord. You can secure things down, obviously. Parachute cord is a very thin but very strong piece of rope. You can actually cut it open, and then there’s strings within the string, and you can use those as well.

Patti: There’s the ranger coming out.

Kris: Yeah, exactly. Shelter, you can help tie up a tarp that would give you a little bit of an impromptu shelter. You can use it for first aid, an impromptu tourniquet if necessary. It can help you carry things if a strap on your backpack breaks, you just fixed it right there. Your shoe breaks, your shoelace breaks, you just fixed it…

Patti: Folks, I think we’re going to keep this guy around.

Kris: Yeah.

Patti: What do you think? Yeah, good point. Very versatile use of parachute cords.

Kris: Absolutely.

Patti: Tell our listeners, where in God’s name do you get a parachute cord?

Kris: I’m sure you can get it at Lowe’s, Home Depot, Amazon, all those.

Patti: Dick’s Sporting Goods, maybe?

Kris: Dick’s Sporting Goods definitely would have it. I don’t know what parachute stores are around here, but I’m sure they all have it as well. It’s very easy to find.

Patti: Professor, I want you to bring in on your list, let’s bring this around to the financial side of things, because not one of you mentioned a will. Not one of you mentioned anything, aside from the cash. Let’s bring this around and close this up with some really…

The purpose of this is for people to recognize that these things are going to happen when you least expect them. It’s great to have these lists of things and great ideas, which is terrific. Let’s bring it in to the financial stuff and say what can people do to prepare themselves for something as it relates to their accounts and their financial information?

Eric: I think that’s a great point, Patti, and I think what it really emphasizes is the need to do all these things before. When you have 30 minutes left, you’re not making changes to your beneficiaries or trying to scramble around and find these documents. It highlights the need to really do your due diligence and prepare beforehand to get all those things in place.

Patti: I also think it’s important for people to know where to go, and where this stuff is located, and to tell other people where the stuff is located. In Jen’s case, God forbid her father was asleep up in that bedroom and had perished in that bedroom.

Did Mom know where everything was? Did she know who to call, etc.? They didn’t have a half an hour to get that stuff together. Far better to be prepared and have the lines of communication wide open.

Michael: Exactly right, so maybe having multiple copies. In your documents, you appoint many important people, like the executor. Maybe there’s a trustee.

Having these people in the loop so that they know about their roles beforehand, obviously, that gives them a leg up to do whatever they need to do if something were to happen to you in an unfortunate event, to bring them in right from the get go.

Patti: There’s one other thing that was not mentioned by any four of you, which would be the first thing, frankly, that I would grab. I would grab my cell phone and a charger.

Michael: I wouldn’t have to grab it. It’d be in my pocket already.

Patti: There you go, and a charger, right? You hope that at some point, wherever you’re going to be going or whatever is happening, you’re going to be able to have access to electricity to keep those lines of communication open with your family and your loved ones.

Eric: A radio would be great if electricity is not available. I had external batteries on there. I have hard drives backing up computers and all that stuff in my box.

I realize that you may not be able to carry a big, heavy fire safe out of the door, so you may have to consolidate some things. I think having it all in one place will make your life easier, and maybe give you the ability to continue on.

Patti: The other thing to think about is you’ve got a car, so you’re throwing the stuff in your car, probably. You’re not running down a street like Eric was with his toilet paper. [laughs] You’re going to have a car, so think about the things like the gasoline and that sort.

Eric: The most gas efficient car, I would assume, right?

Patti: Oh, yeah, yeah.

Eric: Which is probably the smaller car of the two.

Patti: That’s a good point.

Kris: Or would it be the least likely to get stuck?

Patti: Oh, man, you’re killing me, Kris. Wow. Yeah, that’s interesting. He’s just been invited out of the room, because we’re not thinking about this stuff. That’s a really good point.

Again, folks, just to bring this all together. We just want to bring this concept to your attention. It’s one of those things that you hope you never use it.

My dad, when we were growing up, he had fire drills, and we had ladders in every bedroom. He would literally make us go through a fire and have us get out of our bedrooms so that if it ever happened, it wasn’t the first time that we were trying to get out of the window.

Be prepared for anything, whether it be financial or any kind of emergency. It’s the real secret of getting you through it and being able to live through it.

To pull all this through, let me give you the highlights that I heard in terms of the things that you would grab and maybe the impact.

Kris, I think you win the prize with a LifeStraw. What was interesting is that…Let me ask you, Kris. How long can a human being live without food?

Kris: Almost a month.

Patti: You can go a month without food. How long without water?

Kris: Three days.

Patti: Three days, folks, that’s it, so LifeStraw. It’s 15 bucks. You might get a few of them, right?

Kris: Yep.

Patti: That, to me, is phenomenal. That’s a great, great idea.

The second one was a can opener. It’s light, you can carry it. You can throw it in a pocket, and there’s going to be cans of food to get you through to after day 31.

Eric: I’d say bring two, so you’ll have something to trade with somebody else.

Patti: There you go. Michael, I think to your point…Jen, you brought it up at the break, the communication. Something, bring with you a cell phone, a charger, etc., so you can communicate with the rest of the world. Ideally it’s a smart phone. The smart phone’s going to have your documents. At least you’ll have digital copies of the important papers, the important stuff.

I want to say to four of the members of my key team, thank you so much for your input. Thank you so much for joining me on this and being as prepared as you were to talk with everybody out there today.

Thanks to all of you for joining us. I hope this has been helpful. It’s an unusual topic, but one that isn’t talked about enough.

If you have any questions about this or any other topic, feel free to visit our website. Until next time, I’m Patti Brennan. Thanks so much for joining us.

Ep23: Inverted Yield Curve…are we headed for a recession?

About This Episode

Everybody is talking about it…but do you even know what an inverted yield curve is? What is all the panic about? In this very timely episode, Patti and Michael Brennan break down this hot topic of inverted yield curves into simple, understandable terms. They offer actionable steps that you should be taking with your portfolio to benefit from this market opportunity that happened last week!


Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

I’m not sure about all of you listening to this today, but I’ve got a lot of people who are saying, “You know, I’m hearing all about this inverted yield curve. I’ve got my brother in law yammering on about it for the last six months. I don’t understand what in the world it is, and why should I even care about it? What does it mean? Why does it matter?”

To talk about that, because it really does matter, it has important implications for your financial future. I want to explain it in a way that hopefully you’re going to understand and be able to really relate to and act upon appropriately.

Joining me today is Michael Brennan. Michael is a financial planner here at Key Financial, and he is our king of analogies. He is the man who takes something really complicated and uses an analogy to drive the point home. We’re going to use Michael’s gift of communication.

I’ll do a little bit of interpretation so that I understand exactly how it’s coming across, to explain to you what the yield curve is and why it matters to you. Michael, welcome to the show.

Michael Brennan: Thank you for having me, Patti.

Patti: Let’s talk about what this is, fundamentally. All a yield curve is, it is the difference between three month Treasury bills, 1 year, 3 years, 5 years, 10 years. They all have maturities.

Basically, if you’re going into a bank, and you’re going to get a CD, it would be reasonable for you to assume that you’re going to get a higher interest rate if you’re going to lock your money up for 10 full years than you would if you’re only going to give the bank your money for three months.

That’s the same way that the Treasury market works. Treasuries, the bond market, is just a bunch of people like you and I. Bonds trade a lot more than stocks do on a world-wide basis. It is much larger than the stock market. What it is, it’s people’s opinions and thoughts about where the economy is going to be in the next three months, 1 year, 5 years, and 10 years.

Normally you would have a spread, call it two to three to five percentage point difference between, say, a three month and a 10-year bond. In that case, as it was during the financial crisis, there was a pretty wide-spread. What that said is, “Things aren’t so hot now, but things are probably going to get much better.” The wider the spread, the greater the opinion is that things are going to get better.

What we have now, what your brother in law is yammering about, is that it’s inverted. In other words, if you go to that same bank, you’re going to get a lower interest rate on the 10 year CD than you would for a three month. Why does that happen?

It’s because in the Treasury market, the people trading really have a better feel for what’s going to happen in the next three months. They’re really getting uncomfortable about further out. There’s lots of theories and reasons as to why we think things are going to be scarier, that there is a possibility of a recession.

There’s a flight to safety, and everybody wants to buy these longer-term bonds, because they want to lock in even a low, low rate, because they’re worried about the economy. Historically, since 1955, an inverted yield curve has predicted not one, not two, but every single recession we have had since 1955.

If you’re watching TV, you’re watching the news, and you’re seeing the headlines. You’re seeing the stock market dropped 700 points one day. It goes up 300, drops another 500 points. People are beginning to freak out. You might be seeing that, saying, “Why is everybody freaking out? And what is this yield curve thing, and should I be worried?”

My goal here today and with Michael is to break that down to help you understand what it is, what might be happening, and more importantly, what you should do about it.

Michael, let’s kind of use your gift of metaphors. We’re going to borrow from Neil Irwin of the “New York Times,” who published this terrific article that explained the yield curve the way that you like to explain it, too, using a sports analogy. Tell me if you could, how would I use this conundrum of this complicated concept, and break it down into what a lot of people like to do, which is watch football.

Michael: All right, Patti. Thank you for that textbook definition of the yield curve, why it’s inverted, how it could be inverted, and what that means to us. I am going to steal a beautiful analogy from Neil Irwin of the New York Times that he put out about last week, I think it was, August 16th. I was using this analogy when talking to my good buddy and his wife over the weekend.

They were lost the moment that I said inversion, let alone yield curve. Being a big sports fan, and with the NFL season coming up very shortly here, I think that a sports betting analogy may make this a little bit clearer. We could probably all agree that the New England Patriots have been the best team in the NFL for the past two decades.

Patti: I don’t know, Michael. I’m a pretty big Eagles fan. We did win the Super Bowl two years ago, but I’ll give you that. They beat the New England Patriots, I’ll add.

Michael: This is true. This is very true. Anyway, for example, you or I can walk into any casino today and we can wager on how many games the Patriots, or the Eagles, if you wanted to, will win in this season, who will win the Super Bowl, on and on. We can bet just about anything under the sun.

To take the example further, what if casinos not only let us bet on this year’s Super Bowl winner, but what if they allowed us to bet on the winner of the 2025 season, 2030 season, on and on and on? What if we could place a bet for the winner of the 2020 Super Bowl and also the 2050 Super Bowl?

Would it make sense for us to be rewarded a higher dollar amount for predicting the 2050 Super Bowl winner as opposed to predicting the 2020 Super Bowl winner? After all, we have no idea what the teams…We don’t even know what the NFL will look like in the year 2050. We don’t know who’s going to be playing who. We don’t know who’s injured. We don’t know anything. We don’t know coaches, any of that.

Patti: I would expect that you would get a bigger reward, a bigger payoff if you predicted the 2050 Super Bowl winner, no question about it.

Michael: Makes sense to me. In this case, our fictional Patriots yield curve is inverted, and so is the actual United States Treasury Bond yield curve today.

Patti: What that means is right now, the yield curve, or people bettors, to use your analogy – think that, “Yeah, the New England Patriots are going to be good again this year. They’ve got Brady. They’ve got Belichick. They’ve got a great team. They’re going to be good again this year.”

I don’t know. I’m not very optimistic about how they’re going to do in 2030, just 10 years out, because I don’t know if Brady’s going to be still there. He’s probably not. He’s 37 years old. Or Belichick.

Michael: 42, but you get the picture.

Patti: Oh, sorry. Yeah, I get the picture. Man, he’s aged very well, I will add.

To make a bet on the 2010, I would definitely suggest – and I am not optimistic about the Patriots in the year 2030, therefore, there’s a lower payoff for that. That’s where the inversion…I’m going to get a bigger payoff for this one year, if you will, this 2019 team, than I would for the 2030 team. It’s inverted.

Michael: Again, to me, it makes zero economic sense. It should be easier to bet on next week’s game as opposed to the game a decade from now. We have no idea what is going on with the team, the coach, the opponent, the weather, where it’s going to be played. We don’t know any of that.

Patti: Basically, with that uncertainty and that pessimism, which is what is being felt in the Treasury market, the Treasury market is not optimistic about the United States economic future. Therefore, it’s betting on the fact that it’s not going to do well, so the yield on the 10 year’s lower than the yield on the 3 months. That has been a very good predictor of an impending recession.

Michael: Essentially, the relative prices of the short term versus the long term betting contracts would tell us whether a team or an economy is viewed as on the upswing or the downswing.

Patti: What’s interesting is, again, to take this one step further, in Neil Irwin’s article, he talked about the Arizona Cardinals. In the last 10 years, the Arizona Cardinals, they were not a very good team at all. In the short term, there’s a lot of uncertainty. However, they did just get a superstar quarterback. They have a brand new coach.

Their longer-term outlook, once they get this guy working within the system, could be quite good. Their yield curve is actually a normalized yield curve, where the long term looks better than the short term. That’s the difference. The economy in 2009 was more like the Arizona Cardinals. The economy right now is kind of like the New England Patriots.

Whether you’re talking about a sports analogy or whether you’re looking at the economy, the question becomes, is the yield curve right? Historically, it has been correct in predicting recessions. The average recession occurred, on average, 22 months after the yield curve inverted. Just so you understand this, the yield curve has inverted. It did an intraday, and then it closed, literally, this Friday inverted.

It has to stay inverted for a period of time before it becomes relevant. Right now, we may just have a head fake, so I don’t want anybody listening to this broadcast running out, screaming in the streets and saying, “We’re going to have a recession. We’re going to have a recession.” I think it was Brian Moynihan that said last week, “The only thing that we have to fear about a recession is the fear about a recession.”

Michael: I love that. I also love the line that says, “Yes, while history does show us that an inverted yield curve forecasts a recession, it’s also very true that autumn forecasts winter. While one eventually follows the other, nothing indicates precisely when it’s going to happen or what to do about it.”

However, they do appear, in late economic cycles as investors grow anxious about these signs of an approaching recession such as slowing growth and tightening credit.

Patti: It’s interesting, Michael, because the New York Fed has a model. They have a model that uses the yield curve, as well as a number of different indicators, and puts the chance of a recession in the next 12 months at 32 percent. That’s based on, literally, data as of the end of July. The only other time that the probability was this high without a recession following was in the late 1960s.

Here’s really important that everybody understand. Like today, in the late ‘60s, it was a time of very low inflation and low unemployment. That’s, again, back to the Goldilocks economy. Really what’s happening is markets — again, I can’t emphasize – is just people are trying to anticipate and figure out what’s going to happen in the future.

You’re hearing a lot right now about the trade war and that that’s going to lead to a recession, because people are going to pull back, there’s not going to be the trade, and, “Look what happened in the Depression when the Smoot Hawley Tariff Act was passed. Trade fell off a cliff, and we ended up in a very long and protracted recession.”

I don’t think anybody expects that dramatic a tariff situation. I do believe that our leaders have learned from the past, but it is of concern. One very important thing that you all really need to understand is that as it relates to GDP, trade only contributes between three and four percent to our GDP. You and I, as consumers, contribute 70 percent to GDP, so psychology is very important.

For all of you out there, to pull all of this together, what do we do about this information? Number one, don’t panic. Here’s the deal, guys, we go through recessions, they’re part of the natural business cycle. Understand that they happen, invest your money accordingly.

If you’ve got a job, and you’re not quite sure about your future in your current employment, you might want to bump up that emergency fund in case a downsizing occurs. If you do need money in the next three to five years, I would move that into something relatively safe. That’s number one.

Number two, let’s turn some lemons into lemonade. Michael, what should people do about their mortgages and their other forms of debt?

Michael: Right now, we can use these low yields to our personal advantage.

While the yield curve may be inverted, it’s very attractive for those looking to refinance. Currently, 30 and 15-year rates are extremely attractive, and it may make sense to refinance at a lower rate.

I think it’s also important to remind ourselves that recessions are inevitable. Now would be a good time to make sure that your asset allocation is good as opposed to making tactical moves in anticipation of any market downturn. I think it’s important to remember that downturns happen.

Patti: That’s exactly right. It is important to remember that downturns happen. Invest your money accordingly, that A, if you don’t need the money in the next three to five years, it’s a great opportunity to buy low when that happens.

Number two, recognize that they do happen. Don’t panic. You don’t need this money for the next 10 years or even longer, and so the worst thing that you could do is to try and move out and move to cash. Please don’t do that. Just understand, we’re going to have some more volatility, maybe another bear market. No big deal, they happen, so do recessions.

Really, the takeaway here, if we can summarize it, is the economy is good. We all agree on that. Is the economy good, getting better? It could get better if we get resolution on the trade war, the Federal Reserve cuts interest rates, yada yada yada. Maybe it’s getting better. The last thing you want to be doing is moving into cash, and then things really rev up again.

Or is it getting worse? Nobody knows, including Patti Brennan, Michael Brennan, and all of the experts that you see on television. Don’t make any rash decisions. Understand that this is a long term thing, and understand how to use this thing called the inverted yield curve to your advantage.

Michael: We all know that we cannot control the stock market. What we can control is our risk appetite and how we react. Also, is the discipline in the midst of any possible decline. We can take this time to rebalance back to stocks. If you don’t have the stomach to do that, it may be time to revisit your stock to bond mix while prices are close to an all-time high, within five percent of it.

Patti: Exactly. For those of you who are still worried, even after you listen to this podcast, contact your advisor. Your advisor is your best friend when it comes to these times. There are so many good people out there just waiting to help you get through the tough times.

Michael, thank you so much for being here with me today. I loved your sports analogy. Thanks to all of you who are listening today. I hope this was helpful. I hope this took something very complicated, and we were able to boil it down into something that was understandable, and more importantly, useful in your daily life.

Anybody that has questions, come to the website. Until next time, I am Patti Brennan, and thank you so much for joining us today.

Ep22: Risky Behavior

About This Episode

There is a certain amount of risk inherent in most every action. What does a savvy investor or advisor look for in reducing portfolio risk? Patti Brennan and her Chief Investment Officer, Brad Everett, reveal three specific examples of what they look for in choosing investments for their clients’ portfolios. Learn how they minimize portfolio risk while still positioning the portfolio so the client can accomplish their goals.


Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best life.

Joining me today is Brad Everett. Brad is our chief investment officer. Brad, welcome back to the show.

Brad Everett: Thanks, Patti.

Patti: We’re going to be talking about a lovely topic, and that’s all about risk. Risk is, for those of you who are listening, it is everywhere around us. How do we manage it in such a way so that it doesn’t overwhelm you? How do we manage it in such a way so that it doesn’t overwhelm the portfolio?

How do we make sure that we’re taking the right kinds of risk to accomplish your financial objectives? What we thought we’d do today is just help to define the things that we look for as we’re choosing different types of investments. We’re going to break this up into three segments.

The first is, the risks involved in fixed income investments – bonds. You don’t think of bonds as being risky, and yet there are definitely things we are looking for to make sure that we reduce or eliminate as much of it as we possibly can.

Then we’re going to be talking about stocks. Of course, that’s what everybody thinks about. It’s the risk of losing money in the stock market. Well, you’re going to learn today that there are other types of risk that are as important and sometimes even more devastating to the quality of your life than just stock market risk.

That’s going to be the third segment. That is the risk of life and your financial affairs not being what you would hope that they would be. So what can we do to make sure that you’re able to accomplish the things that you want to accomplish, minimize the risk as much as possible, and make sure that you’re doing the things that you need to do to live your very best life?

Brad, let’s start out with fixed-income investments. Fixed income investments could be bond investing, it could include other types of investments like preferreds and things of that nature. We won’t get into the weeds on that stuff. Let’s just talk about what you look for when you’re investing in those types of instruments.

Brad: I guess to start, we kind of look at risk maybe not as such a negative thing. I think a risk is more of an exposure. A lot of times we think of risk as just something that can go wrong, or a downside. Any of these things that we’re going to talk about, and anything that we look at as a risk, can work for you as well.

Anything that seems negative, the opposite is usually true too. It’s not usually like the risk of getting hit by a bus is all bad or neutral.

Patti: Although, it’s not great. [laughs]

Brad: Not getting hit by a bus is neutral, and getting hit by a bus is bad. Usually, with investing, interest rates rising could be good or bad, and then if you’ve identified interest rates rise is bad then interest rates going down is probably good. There’s a whole spectrum in between.

Patti: That’s a really good way to start off. What you’ve just identified is a thing we call interest rate risk. That is when interest rates go up, bonds lose value. Right?

Brad: Sure.

Patti: We take a look of where we are in the economic environment, listen to what the Fed says and say, gee, is it likely that interest rates are going to go up or down? How can we position the bond part of the portfolio accordingly?

Brad: Sure.

Patti: Of course, it’s always going to be difficult to know for sure what’s going to happen, which is where the magic of diversification comes into play.

Brad: An interest rate risk is like, if I’m going to commit to a company’s bond for 10 years, and it’s going to pay me five percent a year, and pay my principal back in 5 years. If interest rates all of a sudden go up to seven percent, my bond is not going to be very appealing anymore. No one’s really going to want to buy that.

I can sell that and go out and buy a new seven percent bond.

Patti: Why would I want to buy your bond at five percent when I can get a brand new one at seven?

Brad: Sure. Yep. The act of having locked into that payment stream is…you’re committing to the next 10 years of receiving that payment. Again, rates could go down and you would find that your bond was actually very valuable. People would love to buy into your five percent income stream.

That’s what we think of as interest rate risk.

Patti: Exactly. Let’s talk now about this idea of liquidity risk. This is often what you find in, for example, high yield bonds. They’re just so many high yield bonds out there. What makes a market is for every seller, there has to be a buyer.

Well, what happens if the economy is going through a really rough patch, and these high yield bonds are with companies that are teetering on the brink of not being able to make a payment, and as a result you want to sell your bond, but nobody wants to but it.

Brad: Yeah. Exactly right. That is definitely a risk. Oftentimes, the thing to be cognizant of is which of those risks work together. You would hope that the time that the economy is bad, and you have no liquidity in your bond, is not the time that you need money.

You want to use the investments that have the potential to be liquid at times like that. You want to be in the situation where that’s not the money that you need because you’ll be forced to sell it. Probably, really bargain base on the prices that you don’t want to have to liquidate at that time.

Patti: That plays really well with this financial risk. Even if the whole market isn’t going down, a particular company might be going through some financial difficulty, and they may not be in a position to be able to pay those interest payments.

Again, folks, for those of you who are listening, let me keep this real simple for you. Bonds represent debt. Stock represents ownership. If you have a bond with a company, or a municipality, or the federal government, you have lent that entity $10,000.

For that loan, they’re going to pay you five percent over the period of time, whether it be 10 years, 20 years, 30 years.

Eventually, at the end of that horizon, they’re going to give you your money back. The thing that people often don’t realize is that bonds trade four times more than stocks do. The bond market is huge. People buy and sell bonds all day long, worldwide.

It’s a huge, huge market. Again, you’ve got to understand that each company and each industry may go through some challenges, and you want to make sure that you don’t own their debt. Right?

Brad: Yeah, exactly. I think financial risk, with a personal example, it’s pretty easy to see how it works. If you’re an individual that makes $50,000 a year, you can probably get a credit card. If you go up to 100, you’ll find more credit card companies that are more than happy to give you another credit card.

Same for when you get to 150 and 200, and all the way up. All of a sudden, people will give you $100,000 worth of credit card debt, but you’re not going to lose your job gradually. You’re going to lose your entire job, and you’re not going to be able to payback any of them. Not just the new ones that were issued to you.

The same thing works with a company. When they fall on hard times, more than likely, they’re not going to give you a little bit back, they’re going to give you none of it back. That’s how financial risk builds into the…It can sneak up on you when times are good, and they just borrow more and more and more because it’s appealing.

They don’t have to issue stock and dilute shareholders. Again, they can borrow, and the owners still have their ownership bucket. When the cycle reverses, and companies aren’t doing very well, they can…

Patti: You’ve brought up a really important point. It’s really hard to pick the debt, for you to choose where you want your debt instruments to be with. In other words, things can be rosy today, but unless you’re reviewing those balance sheets on an ongoing basis while you still have that bond, you’re not going to know if they’re going through financial difficulty.

You’re not going to know if you’re really taking a lot of risk with that $100,000 that you’ve invested in that bond. That’s why the value of diversification, and frankly, professional management, really comes into play. It has become a very, very complicated world out there, and it’s difficult to stay on top of these things.

Things can happen out of the blue that you just don’t anticipate, can’t anticipate. Think about General Motors. You know, Brad, I often use that as example. General Motors, in 2008, went bankrupt. They went bankrupt. Yes, they had to pay back their debt, but let me tell you something, folks.

The people who held the bonds got pennies on the dollar. If you had common stock, remember, bonds represent debt, stock represents ownership. If you had General Motors stock, you lost all of your money.

They go into bankruptcy. They come back out. It’s a brand new company. They don’t have the debt. They don’t have the common stockholders that they had before. They get to start squeaky clean, but you have lost everything.

Brad: Yeah, they’re still not going to pay you back.

Patti: Exactly. That’s a really important thing to keep in mind as you’re thinking about where to deploy your assets. That is what risk is all about. What is this thing called reinvestment risk, Brad?

Brad: Sure. Again, this ties back into how interest rates change over time. It’s wonderful to get your five percent for 10 years. Once that 10 years is up, and you get the proceeds back, you principal, your original $50,000 investment, you have to find something to do with it again.

Just because you have this deal for 10 years, or whatever the term of the bond is, doesn’t mean it’s going to extend forever.

That, and you’ve got the ongoing coupon payments that you have to reinvest over time as well in order to really get the full rate of return on the bond.

Patti: I saw that even with CD. We saw that in 2005 and 2006. People were getting six percent on their CDs. Great. It’s wonderful if you were able to lock in for 10 years. Fast forward to 2016, and you were getting one percent.

You talk about a risk to financial security. That’s a huge risk of not getting that extra five percent that you were counting on in order to be able to pay your bills. It’s a really important thing to keep into consideration. Can you control it? Can you avoid it?

No. But you can manage it, and the way that you do that on your fixed income is to make sure that you have different types of debt instruments. For example, Brad, I’m going to let you give the highlights in terms of how you set up a fixed income portfolio and the different types of fixed income.

Brad: Sure. We try to diversify across several respects. For one, like you said before, it is pretty tough to do to build a really diverse bond portfolio buying individual bonds. I think that most investors probably don’t have the net worth to truly diversify across bonds.

If you find bonds with $25,000 or $50,000 minimums, you have a pretty hefty portfolio size in order to really be able to afford 20, 30, 40 different kind of bonds across different sectors in horizons, and things like that.

Patti: Guys, I’m going to give you an insight or tip that not a lot of people know. I’m going to give it to you real as I always do on this podcast. If you’re looking for a bond, sure, we could get you a bond. It could be a $50,000 bond, it could be a $10,000 bond, it could be a $100,000 bond. What are we going to do?

We’re going to go out to the bond market, and we’re going to look for bonds that meet certain criteria. I got some bad news for you. The ones that are available to individuals are nothing compared to the ones that are available to money managers.

Quite frankly, if I’m a bond trader, I have one of two choices. Let’s say it’s a $10,000,000 lot. I have one of two choices. I could call the Patti Brennans and Brad Everetts of the world, and sell this at $50,000 a pop.

If I do that, I’m not going to give it to Brad for the same price that I’m going to give it to the guy at the mutual fund company, and I can get rid of the whole thing in one lot.

Remember, these people trade. They make their earnings based on volumes, based on commissions. Let’s face it, it’s a time factor. They’re going to call the big boys first or the big girls, frankly, and they are giving them access to the better bonds for a lower price than you and I can get.

I’d love to be able to do that for you. Again, I’m going to give to you real. We can’t. We just don’t have access to the paper that the big companies do. As you think about this, yes, you can ladder portfolios. Yes, you can do that, but there are risks in doing that, and you just want to make sure they understand the risk that you’re taking when you do that.

Let’s talk now about stock market risk. Everybody worries about the stock market. To your point earlier, Brad, that I think was so important, volatility is not lost, it’s just fluctuation. What can go down can also go up. What are your longer-term objectives, and over what period of time do you need to accomplish them?

We often talk about risk and return within the framework of time when we talk about the types of market risk, and the types of things that we look at when we’re investing in the market. Let’s talk about economic risk, what happened on Friday.

The market came out, the bond market did its gyrations, and the yield curve inverted, and the stock market plummeted by two percent. People were freaking out that the economy is on the verge of a wicked recession.

That’s an economic risk, but not every company that went down in value is going to be affected by recession. Frankly, dollar stores are probably going to benefit because people can’t afford Nordstrom’s anymore. That’s an example of a company that can actually benefit from a recession.

The fact that people are pulling in the rings, they’re still going to buy stuff. It’s just they’re not going to spend as much. They’re not going to go to the luxury type stores. Yet, everything went down on Friday. Give us another example of economic risk.

Brad: Yeah, exactly. We look at levels of risks, and economic would be the broadest type. If a terror, if it’s announced, or a terror, if is taken away, those would be broad economic risks. Oftentimes, investors don’t have the time to process what exactly the result of that will be.

This thing happens, it broadly sounds negative, everything is going to drop. Then, as the dust settles people will spend time saying, “Well, this sector actually might do pretty well, this sector is probably gonna do worse than even we thought.”

This will continue to adjust from there as people have time to process the actual industry specific risks and then the risk to specific companies themselves.

Patti: It’s a great example. An important point to bring out is the difference between traders and investors. The traders are going to be reacting. That’s when you see those huge swings, those huge plummets, frankly down, as well as up. Friday, we lost two percent. What’s happening today?

Everybody had a weekend, they did their research, etc., and guess what, the market is recovering already. That’s the difference between a trading mentality and an investment mentality. We are investors. We’re even bigger than that, frankly.

I don’t mean bigger in the sense but we’re really looking at, what do we need to do in that kind of portfolio to help them to accomplish their objectives, whether they’d be a year from now or 5 years from now or 20 years from now? How do we allocate their resources in the safest way possible?

Brad: Of all these risks and things that we choose to be exposed to, some of them are appropriate for certain investors and some of them are just aren’t. We need to know what risks every investment is exposed to or could be subject to, and go from there and figure out whether that’s appropriate for an individual investor or not.

We might think an investment in an international small cap companies is great for young, aggressively oriented person, but that doesn’t mean it fits somebody that needs to make up a 529 plan withdrawal next week.

Patti: Exactly. Time horizon is really, really important. Let’s talk about this thing called business risk or specific risk. How does that relate to the people that are listening today as it relates to choosing stocks, for example, or instead choosing a mutual fund or an ETF?

Brad: Business risk is risk that’s very specific to a particular company. It’s risk of one bad decision by the CEO. It’s risk of somehow them being the only company on a fault line, and they fall in an earthquake.

Patti: I think your point about the one company, one CEO, how often do we hear earnings reports and the earnings…? A CEO will give their expectations, and then the next quarter they fall short of what those expectations are. If a CEO doesn’t really…if they’re not able to predict what their earnings are going to be just three months from now, how are we going to know?

Brad: Right.

Patti: Right.

Brad: Sure.

Patti: That’s a good example of business risk.

Brad: It could be a contract that expires that doesn’t get renewed. It could be anything that affects one company in particular, but not the whole sector or the general economy.

Patti: It could also be sector related. What about regulatory risk? What if all of a sudden…like what happened after the financial crisis when they came out with some of the regulatory constraints on banks?

What did banks do? The whole sector went down, big time. They’re still recovering from that. In fact, that’s lowest performing asset class, or sector, of anything that you could invest in when you look at the last 10 years.

They’ve had the headwinds of regulatory pressure that’s affected their earnings because they’re having to spend so much just to keep up with the rules.

Brad: Another example of the specific risk is what just happened to Biogen last week. They abandoned late stage testing in their Alzheimer’s treatments. The stock fell 30 some odd percent late last week.

Patti: That’s a great example.

Brad: It doesn’t affect Exxon Mobil. They couldn’t care less. That’s a very specific business risk that they were exposed to but nobody else.

Patti: I think it’s really, really, interesting and important to point out. When you take a look at the last five years, I think it was JP Morgan that did this. When you think about the Standard & Poor’s 500, it is 500 companies. Actually, it’s a little bit less than that, but let’s just use 500 companies. Did you know that in the last five years, 45 percent of those companies lost value? You lost money if you invested in them.

So what is this about the S&P 500 doing so incredibly well, when only 55 percent of the companies actually had a positive return? What’s the deal with that? What’s interesting about that again, 45 percent of those companies lost money.

Do you know that only 3 percent of mutual funds and ETFs in the exact same asset class lost money? You choose. Do you want to be doing individual stocks or do you want to be more diversified? That’s really the issue that we have with business risk or specific risk, right?

Brad: Sure. Yeah, absolutely.

Patti: Now let’s talk about stocks overseas. What kind of risk are we talking about with stocks overseas?

Brad: All the same ones that they have here, plus a few others. There’s what you would think of as sovereign risk, or their regulatory risk, is not the same as ours.

They may be more of a government-controlled business environment, or just exposed to other regulatory concerns that we are not. Maybe there’s internal strife or a king or something like that.

Patti: Yeah, look at Brexit. That has nothing to do with the United States.

There’s lots of really good companies located in England and Great Britain, and yet they’ve got this thing called Brexit. There’s a lot of uncertainty in terms of how it’s going to affect the economy, and therefore, the companies that do business there.

Brad: The currency exposure’s a huge one too. As a domestically based US investor, anytime you invest in a Japanese company for example, a significant part of your return could be the fluctuation between the dollar and the yen.

No matter how well Samsung does, you’re going to either have an addition from the currency, or a subtraction.

Patti: I feel – and I don’t know about our listeners – when we get to currencies, I begin to glaze over. I don’t know why, I just don’t get it.

Let’s boil it down and give people a sense of what’s happened over the last few years.

The dollar has gone up. Therefore, international stocks have not been a great place to be. Now the dollar is high – or relatively speaking, it is much higher than it used to be – if the dollar begins to go down relative to other currencies, then the opposite is true, right?

Brad: Sure.

Patti: Doesn’t that mean that those international companies could actually be even more attractive?

Brad: Yeah. Almost this entire conversation of risk boils down to that exact thing. All of these are things that you’re exposed to that can go one way or the other.

The dollar could continue to go up, or it could turn around and they could meet somewhere in the middle, but you have to know that you’re exposed to them, and that there’s a component of your rate of return.

Then, knowing that you’re exposed to that, you try to make an educated guess about what the path of the dollar price could be. What are the things that could cause it to continue to go up? What are the things that would cause it to continue to go down?

You try to make an educated guess based on things like that. Which of these is more likely? I don’t know, but can we get to 70 percent, 30 percent? Can we be more sure than not?

Patti: That is exactly right. Most people listening today, they don’t really follow currencies, etc. For everybody listening, that’s where your advisor really comes in. Where they can give you, again, boil it down to simple, figure out what you need to accomplish, and figure out which risks you’re able to take.

They’ll manage as much of it as they possibly can. They understand or, at least, I can speak for myself. We totally get it. We understand currency risks. We understand all of that. We’re not trying to guess what the dollar’s going to do in the next year, or even in the next five years.

We believe that the companies that are located in other countries, many of them are doing things better than we are.

Our economy may be strong now. The reason that the dollar went up was because the Federal Reserve was increasing interest rates. What happens when that stops? Which, it has. What happens if they begin to cut interest rates? Well, gee, that could also happen. How do you want to position your portfolio accordingly?

If it’s something that you’re not comfortable with, then that’s when professional help can really come into play. Let’s go into the risk that people experience in life, in general. We talk about it a lot. Things like purchasing power risk, longevity risk, and the risk of being risk averse.

Let’s talk about that first one, the risk of being risk averse. That sounds like it’s an oxymoron. Is it really a risk of being risk averse? I say yes. What do you think?

Brad: There’s a couple ways to define it. Humans, by definition, are risk averse. I think if you’re faced with two options that should hopefully deliver, that you would expect to deliver the same outcome, you would choose the one that has the least risky path.

If you were faced with two outcomes that were equally risky, I would choose the one that offered the best possible outcome. It’s what keeps up alive through the generations, is to be risk averse, and to avoid taking chances that we don’t need to take. I think…

Patti: You know what? I’m going to stop you right there. What you have just said is, you are the voice of a portfolio manager. That’s the way a portfolio manager looks at risk. You don’t want to take risk that you’re not being compensated for.

When you’re looking at two investments, you’re going to choose the one that has the lowest risk and the same amount of compensation. In real life, that’s not the way people really are, are they?

Brad: No, you can certainly be irrationally risk averse. If you have a 40 year investment horizon, you would not choose bank CDs to fund your retirement, I would hope. That is risk aversion going bad.

Patti: That’s exactly right. What we often think about risk is the risk of loss. What about the risk of not accumulating enough to do the things tha