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 that you want in life? I often talk about this. I say, “You know what? Don’t confuse stable with safe.” CDs are stable, but in Brad’s example, do you consider that safe?

That person’s not going to have what they need when they want to send their kids to college, buy that second home, or retire in comfort, and never have to look back.

Brad: Downside risk and shortfall risk would work oppositely of each other. You could protect against the downside, but then you stand a big chance of not making enough on the upside.

Patti: That is true also even for people who are older. A lot of people assume that, gee, when they get into their 60s and 70s, that they should not be taking any risk at all.

I beg to differ because people are living longer, and we’ve got this inflation risk. We’ve got to make sure that you maintain the purchasing power of your income for the rest of your life. A lot of people are not necessarily planning on leaving a dollar to their children. We do come across those people every once in a while.

Brad: Every once in a while, yeah.

Patti: Yet, that’s not safe, either, because what happens if you live another year? You can’t live on a dollar. We don’t know how much longer we’re going to live. We’ve got to position this and position the portfolio. If someone comes in, and has $20 million, and they need a hundred thousand dollars a year, yeah, they can be all in CDs.

By all means, have at it. You don’t have to take any risk. Everything is relative based on your personal situation, what you’re comfortable with, and what you need to have happen. Right?

Brad: Yeah. You’re correct.

Patti: We’ve talked about longevity risk. We’ve also talked about this inflation risk. This risk of, gee, like in my mom’s case. Brad, you know this story. When my dad passed away in his 60s, they had seven children. I’m one of seven.

They put us all through college. I went to Georgetown. They really were not able to save a lot of money for retirement. My dad retired. They had pretty much what they were going to have. Then he got sick. He got sick, and he did not live nearly as long as we had all hoped. He died when he was 66 years old.

Now, my mom was perfectly healthy. She loses his social security. Actually, she ended up taking the widow’s benefit. She’s got a little bit of a pension. Now, I have this nest egg that I got to make last for the rest of her life. You know, when this first happened, $3,000 a month was plenty for her. It was a lot of money for her. Yet, I will tell you Brad, she lived until she was age 83.

The world out there, Forbes and Baron’s, they seem to think that I’m pretty good at what I do. I got to tell you, it was really hard to make this work for her. She was worried she was spending down her principal. It was a very, very uncomfortable and different situation. That $3,000 a month just wasn’t cutting it anymore, and we had to dip into principal.

Boy, once you start that process, it becomes a flake here and there. A little bit once in a while is fine, but then that becomes a snowball. The snowball starts rolling down the hill. It’s an avalanche, and she’s wiped out. The most important thing is don’t ever let that happen to you.

Inflation is like hypertension, right? You can’t feel it. You don’t know you have it, but it can kill you. That’s what we talk about in terms of inflation risk, longevity risk, and investing so that it’s so safe that you’re not able to make the money last well into your 80s.

When you put together a portfolio for our clients – and for those of you who have advisers, your advisers are doing this as well – what are the things that you look at in terms of putting the portfolio together? How do you look at this big…? We talked about so many risks. How in the world do you keep it all straight and put together something that’s going to work for people?

Brad: Sure. Again, as I’m sure you discussed in previous episodes, we start from the financial plan. We know what the clients’ goals are, how long they have until they meet these various goals and things like that, what their personal risk tolerance is and things like that and back into a list of exposures that we’re comfortable with.

If it’s somebody that needs some stability or cash from their portfolio, we have to consider fixed income. Within the fixed income, what risks do we want there? What kind of timelines do we need various cash flows for?

We want to diversify across time horizon. We want to diversify across credit quality. We want high-quality bonds there, maybe some low-quality bonds that the trade-off is a higher income stream. Maybe this is a client that can afford to buy that kind of risk. We want to diversify across geographies and then look at international bonds and things like that.

Same thing with the equity side, we want to make sure we have representation from sectors that we feel are in a good spot, have a good valuation, and look good going out several years, but also to protect against us making bad decisions. Various size companies, vary geographies.

Patti: Brad, I love what you just said, because I think it’s so important for the listeners to know that we are all human beings. The most important thing is to recognize that. I believe that humility is probably one of the most important qualities that I looked for when I hired Brad many, many years ago.

I found, and research has proven time and time again, that when you get people who are overconfident, who are making those big bets, who are doing lots of trading, there is an inverse correlation. Meaning, an opposite effect with that approach to investing and the results that you get on your portfolio.

Recognize that things are going to change. There are things out there nobody can control. You watch it. You monitor. You adjust along the way. That’s where you get the best outcome. To pull this together, Brad, one of the things in the themes that have come through this whole episode is that risk isn’t always bad.

Risk is just…It’s downside, but it’s also upside. There are lots of risks out there, inflation risk, market risk, business risk, longevity risks, etc. The most important thing is recognize that these risks are out there and choose which risks are you willing to take.

What can you diversify away? What can you manage in a way where it’s not going to be detrimental to your long term objectives? Then you monitor the portfolio as it relates to the goals that you’ve set for it. Remember, your money is a means to an end. Let’s figure out what you want to do.

The Brads of the world, your chief investment officers are figuring out the best combination of investments that will get you there. If things don’t go quite as we had hoped, we adjust along the way. That is what real financial planning is about. That’s what financial navigation is all about.

Every financial adviser is out there doing on a day to day basis to help you accomplish your most important goals. By the way, if I could just tell you this, not everybody needs a financial adviser. This might be something that you like to do.

Whatever it is, again, getting back to the risks, understand the risks that are out there, understand how they are defined, understand how your investments are exposed to those particular risks. Look at the different ways that you can avoid or reduce those risks. Make sure the portfolio has position to do the things you want to do in life.

Brad, thank you so much for joining me today. This was a great episode. Not a fun topic necessarily, a little bit dry, but if you don’t know about these things, you can’t do anything about them. That’s the worst that could possibly occur.

That’s it for today’s show. Thank you so much for joining us today. If you want to learn more about this, if you want to learn more about the tools that we use to reduce or eliminate risks, head over to the website. Give us a call if you’d like to set up a meeting.

We’ll be happy to sit down with you, talk about your personal situation and do whatever we can to help avoid these risks that we’re talking about today. If you’re online and want to give us comments, tell me what you thought about today’s show. We would love to hear from you. Until next time, I am Patti Brennan. I will see you in the next episode. Have a great day.

Ep21: Estate Planning Mistakes

About This Episode

Just because you have a will tucked away in a drawer somewhere doesn’t mean you and your loved ones are protected in case of tragedy. In this episode, Patti sits with Stacey Willits McConnell, Chair of the Estate Planning Department at Lamb, McErlane in West Chester. They reveal the most common mistakes people make when drafting their wills and remind listeners about the other equally important documents that need to be drafted along with a will.


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.

Today I have with me Stacey McConnell. Stacey is the chair of the Estate Planning Department at Lamb McErlane. She is a wonderful, wonderful attorney for many, many reasons.

First of all, Stacey has five children of her own. She is the oldest of five children so she’s truly the definition of the sandwich generation. Stacey, welcome to the show.

Stacey McConnell: Thank you for having me Patti.

Patti: Absolutely. Today we’re talking about the most common mistakes people make when drafting their wills. It’s not just in the drafting of the wills. It’s in the planning itself.

When you think about it, probably the number one mistake that you and I find is that people don’t have wills in the first place, right?

Stacey: Correct. A very large proportion of the public does not have a will.

Patti: That’s unfortunate for a couple of reasons.

Stacey: Correct.

Patti: Not just in terms of, gee, nobody knows what you want to do with what you’ve worked so hard for. Also, the other documents, like powers of attorney, financial powers of attorney, healthcare power of attorney, that go along with the estate planning package.

Stacey: Yes. The complete package is a will, a financial power of attorney, and a healthcare power. Everybody needs one of each of those for a complete estate plan.

Patti: The worst thing that could happen is you don’t have these documents. Whether you’re married or single, car accidents happen. People get into the hospital. Who’s going to pay your bills?

Stacey: If you don’t have a power of attorney, the family ends up in court to have a guardian appointed, which is not a good result. It becomes public. All of your assets are public. It’s very expensive – lots of legal fees.

Patti: That’s the last thing you need when somebody’s sick.

Stacey: Absolutely.

Patti: That’s interesting. Let’s assume that people have wills. What would you say would be the next most common mistake that people make?

Stacey: Well, not going back and looking at them periodically. You shouldn’t prepare a will and put it in the drawer, and forget about it for 20 years.

Patti: That’s a really good point. Stacey, you and I worked on a case together where husband and wife had a will they drafted. They put in motion 25 years ago, never looked at it again, ended up becoming very successful, having significant assets, and the wife died quite suddenly. Unfortunately, in this case, the husband was stuck with what they put 25 years ago.

It is really important to take a look at what you have in place. For those of you who are listening, I know you’re thinking, “Yeah, yeah, yeah, I know. I probably should look at it.”

Stacey, why should they look at it? What are they looking for? What could have changed?

Stacey: Certainly, the tax law could have changed, and that would be a detriment, probably not so much to them, but to their heirs. They may not like the executor they choose.

They’ll be surprised who they pick, perhaps, maybe a child that’s not been financially very diligent and would not be a great executor.

Or power of attorney, they pick someone maybe that’s not even living their brother or sister, someone that’s not even in the picture anymore.

Patti: All good points. Going back to the tax law, 25 years ago, the amount that you could leave to the next generation was $600,000, right?

Stacey: That’s right.

Patti: If your will was done in a way to optimize the tax planning, you might have a lot of assets going into a trust for the surviving spouse. It might turn out that you don’t even need it anymore.

The surviving spouse is stuck with the terms of this trust that you don’t even need.

Stacey: Correct. That is a scenario we’ve seen many, many times for that very reason.

Patti: In that case, Stacey, is there anything that you can do with the first death, or is it a mandatory? It’s got to go into trust and spouse’s access to the income, for example.

Stacey: You may be able to work with the whole family to do what’s called a non judicial settlement agreement.

They all agree maybe not have the trust be in place at all, a shortened term, or something different about it, but that would involve working with the spouse and the kids and grown grandchildren.

It might be a solution, but it might not be a solution, depending on the situation.

Patti: It’s very interesting. I know that when my dad passed away in 1997, I was the co executor or I was the executor actually, turned out to be. I was also the co trustee with my mom.

It was interesting because depending on what you want to have happened for your surviving spouse and your children, that may or may not work out.

In that particular case, it worked because I was working with my mom, making sure that she was financially secure. From the court’s perspective, I was considered an adverse party because eventually, I’m one of the beneficiaries of that trust.

Stacey: Whatever doesn’t go to your father would go to you. That’s considered adverse enough from a tax perspective.

Patti: That’s excellent. That’s excellent. You don’t want to do everything from a tax planning perspective, especially given the fact that under current law, you can leave $11 million plus per person. A couple can leave $22 million.

In that case, Stacey, the question then comes. Do you really even need a trust at all? Back then, if it didn’t go into a trust, you lost that credit. Right?

Stacey: Right. You may not need a trust, particularly for your spouse, but you may for other reasons. That’s something you want to sit down and evaluate.

Are you worried about a second marriage? Are you worried about the spouse’s capacity maybe at the time of your death? Those are other reasons to have a trust, but there may not be a tax reason anymore.

Patti: How about trusts for children? In today’s world, we find a lot of kids are underemployed. Or the opposite could have happened. They won the lottery, and they’re doing really well.

They may want or may not want to receive the assets themselves but instead have the assets go directly to their children. In that case, that would be a generation skipping trust. Right?

Stacey: Yes, and that’s where you need to keep pulling out that trust. Maybe when you wrote it 10 years ago, it made sense to go to certain ages and equally to all the kids. Now, it doesn’t make sense anymore that one share maybe should skip to grandchildren. That’s where you need to keep looking at it.

Patti: That’s an excellent point. I think the other thing that I’ve seen – and you’ve seen it as well is, unfortunately, in America today, we have a crisis. It’s the opioid crisis. What I’ve seen you do brilliantly, if I may add, is to add a substance abuse clause. Can you explain to our listeners what that’s all about?

Stacey: Yes. The trustee can make a determination at the time when money could potentially be handed out about whether if it’s appropriate for each beneficiary. If they see a family member that’s struggling with a drug addiction, they may be able to withhold money going directly to the beneficiary.

Be able to spend money for their therapy, their care, even their housing but not hand them money, which could not be a good result for them at all.

Patti: That’s enabling in a whole different level, isn’t it?

Stacey: Yes.

Patti: You don’t want necessarily have what you’ve worked for going to some drug dealer. When we think about some of the other things to consider as it relates to the estate planning, let’s talk about cost basis. That’s a technical loophole that exists in the law today. How does that work, and how can we optimize the tax planning for the listeners today?

Stacey: Cost basis is important from an income tax perspective. When you buy a stock, your cost basis is what you paid for it. That remains the same through your lifetime. When you die, the cost basis steps up to the value on the date of your death.

That’s a great benefit to your heirs, because they can sell that stock and not pay a capital gain, whereas you would have had to pay a capital gain.

Patti: It’s a really good point. I know that when my dad got sick, the first thing we did was that we moved the title of their home up in the Poconos from my mom’s name to my dad’s name. They had paid $50,000 for it. Upon his death, it was worth $250,000.

Mom didn’t want to keep the Poconos. It was too much for her to take care of. The beauty of that was that when she sold it, there was no income tax due on that $200,000 gain.

That was a huge benefit for my mom. She was able to keep that 40, 50 thousand dollars that they would have had to pay in taxes. Being aware of those opportunities.

I was referred into a case recently where, unfortunately, the wife got a bad diagnosis. We had our initial meeting. Then time passed. They were busy with the therapies, treatments, and things of that nature. They came back in about three or four months later.

At that time, we did that balance sheet evaluation, and we began to move the assets into her name. Unfortunately, she only lived eight months. The benefit that we were trying to get was only partially fulfilled.

What is the deal on that, Stacey? Why don’t you tell our listeners? How much time did she have to own those assets in order for us to get the full benefit of the full step up in cost basis?

Stacey: She needs to survive one year after the transfer, so that didn’t happen. Now, they’re not in any worse situation than they would have been without the planning. That just didn’t work in this case.

Patti: That’s interesting. It was a heads you win, tails you break even?

Stacey: Correct.

Patti: If she had lived the 12 months, they would have gotten 100 percent step up in basis, no income taxes if they wanted to sell those assets. Tails they break even, they’re no worse off than they were if they hadn’t done anything at all.

Stacey: Correct.

Patti: That to me is a win win situation. You try to do these things to optimize. Again, it’s not something that you want to think about when someone gets his diagnosis but somebody should be.

Stacey: At least, present the options to the family. They can decide whether or not they want to do it or not.

Patti: Let’s go back to irrevocable trust. I think it’s important for our listeners to hear from you. Are irrevocable trusts really irrevocable?

Stacey: They used to be. You couldn’t change them without going to court for a modification. Starting in 2005, there was a change in the trust law. Now, by family agreement – what’s called a non judicial settlement agreement – everyone can agree to modify the trust.

Some of these trusts have been around a long time. Maybe they own a life insurance policy from 1990. The provisions aren’t the right thing anymore, but they’re not irrevocable anymore. With the family agreement, they can modify them.

Patti: That’s good to know. Don’t be afraid to set these trusts up. We often talk about trust. It used to be that people did trust merely for tax planning, but I find that trust can be wonderful tools to protect the people that you love sometimes from themselves and usually from predators.

You can protect them in the event of a divorce – those assets never become a marital asset lawsuits, things of that nature. Stacey, you know my kids. I often tell a story of my kids and when they were driving. When they were learning to drive, they were terrible, terrible drivers.

Unfortunately, if one of my kids made a bad choice and was drinking and driving and killed someone, who’s going to get sued? Ed and I would have been sued for everything we have.

You can protect your children against things of that nature if it’s owned by a trust. The child doesn’t own those assets and therefore cannot be attached in any way. Is that right?

Stacey: That’s right.

Patti: Are there any special considerations when you’re setting up a trust for those reasons, especially as it relates to the people that you choose as trustees? How does that work?

Stacey: You need to pick an independent trustee so that the creditors can’t attack it and say, “Well, you just picked a family member.” They’re going to do for that person, that is the debtor, whatever they want. We can attack and invade the trust. If you have an independent trustee, it’s going to be much better protected from creditors or in a divorce situation.

Patti: If someone wants to have that level of protection, an independent trustee can be a bank or an attorney. Or could it be a friend?

Stacey: Yes. It’s somebody who doesn’t have anything in the game, but there are standards in the trust they’re supposed to follow, and they have obligation to the other beneficiaries of the trust. They truly are independent, because they’re accountable to every beneficiary of that trust.

Patti: In other words, if they don’t do it correctly, they stand to be sued by the eventual beneficiaries by being too liberal. That’s why the independent trustee in this situation works.

Again, you’re using that kind of concept of adverse party so that someone – the posing counsel who’s representing the future ex wife of your son – he can’t come back and say, “Wait a minute. There’s a quid pro quo going on here. You’re just doing this for, you know, this woman’s ex husband.”

Actually, the trustee really has an obligation to their children. Therefore, is unlikely to be distributing assets liberally and therefore can’t be attached, right?

Stacey: Correct, right. If you had picked a brother or a sister, that’s more problematic. They could say, “Well, I won’t give you money in your trust if you don’t give me in my trust,” and vice versa in that situation. That’s a very different arrangement.

Patti: I think that’s a very interesting thing that you bring up in several meetings about choosing siblings to be co trustees of each other’s trust. Why is that? You’ve had a lot of experience in that, haven’t you?

Stacey: Yes, I have. I think that it can really ruin a relationship among siblings. Think about having to go to your brother and sister to ask for money. Generally, you’re supposed to reveal your budget and why you need the money pursuant to the provisions of the trust. That is not the kind of relationship that you want to have with a sibling.

We’ve also had terrible ones where it’s a second marriage, and the stepchild is named as trustee for the stepmother. That is not a good relationship either in terms of keeping a civil relationship between the two of them.

He’s definitely an independent, because whatever doesn’t go to her, goes to him or her, but it’s very bad for the personal relationship between the two.

Patti: It can definitely get a little achy there. It is very, very interesting. I think that another thing as it relates to all of these in terms of the people that you choose as the trustees or the powers of attorney, it’s not just the people. It’s the powers that you give to those people.

I know that you’re working on a case right now that is a very interesting case. It’s actually going to go to court. Tell me more about that.

Stacey: This is a situation where the man was very ill. It was his second marriage, and he had three daughters from the first marriage. He wrote a will that said, “I leave everything under my will to my wife but only because I have a directed beneficiary account that’s gonna benefit my three daughters.”

He then became more ill, and his wife got a power of attorney for him that included the power to change a beneficiary. A few days before he died, she changed the beneficiary on that directed beneficiary account – it was an IRA account – to herself.

Clearly, that was not in line with what he would have wanted. She did it, so now we’re going to court to try to undo what happened there, because she actually had the power under the power of attorney to change a beneficiary.

Patti: That is really interesting. In that case, the power of attorney gave her that opportunity to change the beneficiary. From a legal perspective, she did have the power to do that. However, doing it a couple of days before he died, it just doesn’t meet the smell test. Does it?

Stacey: No. Luckily, the lawyer who wrote this power of attorney was very good. She mentioned the fact that any use of that type of a power to make a gift like that should be in line with his whole estate plan.

We think we’ll be successful in this case because of what he had written in his will, that he wanted those accounts to go to those children. They’re otherwise disinherited.

Patti: Very interesting. Very interesting.

Stacey: We’ll see what happens.

Patti: These little nuances in the documents can really make a difference. It can make or break the overall estate plan. I think that is one example. The other example is gifts. The power of attorney may or may not be given the opportunity to gift assets while you’re still alive to other people and to themselves.

Stacey: Right. We try to really speak carefully with the clients about those gift provisions. Sometimes they’re appropriate, sometimes they might be too broad. You just have to look at the situation and see what’s right and really go through those powers with the client and see if it’s what is appropriate for them.

Patti: Stacey, thank you so much for joining us today and bringing not just your expertise but your wisdom to the show and to our listeners today.

For those of you who want to reach out to Stacey directly, we’ll have her contact information in the show notes. Again, Stacey, you’ve made such a difference for us and for all of our clients. Thank you so much for joining us.

Stacey: Thank you, Patti.

Patti: OK folks. That’s it for today, so tune in to our next show. In the meantime, I hope y’all have just a wonderful day. This is Patti Brennan. You take care and have a great day.

Ep20: Cyber Security

About This Episode

Did you know that there is a cybersecurity attack every 39 seconds? Since 2013, there are almost 4 million records stolen from security breaches every single day! In this episode Patti speaks with Vince Kailis, Chief Operating Officer at Key Financial, and listens as he reveals more shocking statistics. They discuss how these breaches happen and, more importantly, what the listener can do to protect themselves from falling victim to these scams.


Patti Brennan: Hi, everyone. 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. Boy, protection is what it’s all about. Today, we’re going to be talking about how to protect everything in your life.

Joining me today is Vince Kailis. Vince is our Chief Operating Officer. I will also tell you, he is our resident geek. This guy knows anything and everything that has to do with computers, operations, etc. He’s really, really good as it relates to cyber security because, frankly, we have to be really, really paranoid about all of this stuff.

Vince, welcome to the show.

Vince Kailis: Thanks for having me today, Patti.

Patti: Absolutely. I’m really looking forward to this. You’ve got a wealth of information, lots of wisdom. I think that as we were talking about, some of the statistics that you shared with me were really alarming.

For example, I didn’t realize University of Maryland came out with a study. “There’s a hacker attack every 39 seconds.” They’re constantly barraging all of us, trying to get at our sensitive information, etc.

Since 2013, there are almost four million records stolen from breaches every single day.

Vince: Every day.

Patti: Every day, Vince. Literally, these hackers have gotten so good that they’re getting this information at the rate of four million per day. Think about it, guys, 300 million Americans. How long is it going to take for them to get to every American and their computer?

We have to be extremely vigilant. That’s what we’re really going to be talking about today. The cost of this is tremendous. What I thought was really fascinating is, of course, they’re going after small businesses.

You told me that 95 percent of the breaches, in terms of corporate breaches, came from only three industries in 2016, government, retail, and technology. You have a story about a government breach or a government phishing scheme that just blew me away.

Vince: There was a scary one that came out a few years ago. It was during the last presidential election cycle in 2016. John Podesta’s emails were hacked.

Patti: Now, John Podesta is who?

Vince: We were talking about way high up in politics, people on the Clinton campaign. His emails were compromised in what’s called a phishing attack, which we’ll get into in a couple minutes, probably, to make sure that the listeners really understand what phishing is and what the types of phishing they should be looking out for.

His team got an email that his Gmail account had been tapped. They had gotten this nice little email from the Gmail team that said, “John, your email was hacked. We stopped the attempt in the Ukraine, but you’re going to need to reset your password. Click this link to reset it now.”

Patti: Wow.

Vince: To make matters worse, the Clinton campaign security team emailed his team that, “Hey, it looks like his email was hacked. Go to Google and have him reset his password.” They didn’t do that. They actually clicked the link that was in the email.

Even the security team thought it was a legitimate email, but their way of getting to it was very different than what was in the email. The link took him to a site that captured his username, his password, and all his emails were stolen.

Patti: Wow. That is amazing.

Vince: Subsequently, ended up on WikiLeaks.

Patti: Wow. That is amazing. Let’s talk about this thing called phishing. By the way folks, it is not spelled F I S H I N G, it’s P H. Where did the name come from, Vince, phishing?

Vince: Yes. What us nerds have ways of renaming things, like putting P H instead of F in things. It’s just phishing is a method to get your confidential, sensitive data through emails or through a website. It’s just like regular fishing if you think about it.

I’m going to put some bait on a hook, I’m going to take the line and I’m going to cast it out there, and I’m going to hope to catch a fish. I’m going to hope somebody nibbles on that little piece.

Sometimes that bait is, “Hey, this Nigerian prince really has this money for you,” and sometimes it’s things like, “Hey, we know what you’ve been doing on your computer, and to keep us from disclosing it, click this link.”

Patti: That is really interesting. That’s a form of that ransomware, right?

Vince: Absolutely.

Patti: The goal of phishing is two fold, from what I understand, from what you’ve taught me. Number one is to get our personal information, whether it be our social security numbers, our credit card information, etc., or to load malware onto our computers, where there’s significant damage that could be done as a result of the malware, right?

Vince: Absolutely. Sometimes, they’re not even looking initially for your social security number or your passport ID. All they want is your username and password. If you look at some of the common mistakes people make, they use the same username and password on things.

Once they have one username and password, they can put it into a system that tries to log into hundreds of different sites.

If they get a hit, they’re near your bank account, they’re into your kid’s 529 account, or they’re into a different email that you have. Now they have two email addresses and potentially even more compromising data.

Patti: That’s really interesting. A couple years ago, with the Experian situation, where millions and millions of Americans’ personal information got stolen. The more information that is out there the more likely that somebody is going to attempt at least attack you, get additional information and steal from you.

Vince: Absolutely.

Patti: Tell me more about this URL masking – using different characters in the address, how does that work? How can our listeners prevent a situation when they’re on their computer?

Vince: An example that we gave of the Podesta email, it was the Google email team. It was Google Mail team as opposed to “google.com” with a link to how you get your Gmail.

Patti: It sounds so reasonable. Google Mail team, your emails been hacked. It seems reasonable. Right?

Vince: Yeah. Some of the newer ones – your Microsoft account is about to expire or has been compromised, reset your Office 365 password, that’s a common one going around right now. There’s been a huge uptick of those.

How about this one? We failed to deliver your package today, click this link in the “UPS thing” to set a new time to have your package redelivered. The link actually isn’t UPS, it’s “ups.ru” which is a Russian site. That takes you to a different site. You put in your information about your email address, and whatever, to reschedule the delivery, and you’re not even on “ups.com.”

Patti: Wow. The hacker also knows when you’re not going to be home.

Vince: That’s the next piece of it.

Patti: Wow, It’s amazing. The information, it’s not just the random and get your credit card information anymore. It’s that kind of stuff. You’ve got to be extra careful.

When we heard about this, we literally put those cameras all around our house. It was really cheap. You get them on the Internet, they record, you put the little warning there so that it…So far it’s been a good deterrent but you don’t realize who is getting access to this information and what they could be taking.

Vince: Sure. Can be social media combined with the hacking efforts, put those two things together. They know you’re on vacation that week. That’s the week they’ll hit in your house.

Patti: Tell me more about this social engineering, Vince. I thought that was really interesting when you were talking about it?

Vince: There’s a couple funny stories that go along with this, we’ll go with the funny one to start. There was one I think was three or four years ago that came out, it was on Facebook and on a couple other sites. It said, “If you want to know what your adult film stars name would be, it’s your street you grew up on plus the name of your first pet.”

If everybody thinks about that for a second like, “Oh, yeah, that’s clever. That could have been my adult stars name.” But really what they were doing was they were capturing two of your security answers to security questions. If they had one piece or two pieces – username or password, they couldn’t get past the security question, now they have to have those.

There have been a couple of those viral things that have gone around on Facebook and a few other places, where they were capturing these extra security credentials.

Patti: You think about Facebook and some of those other, Instagram, etc. My kids are posting that stuff all the time, thinking it’s just random and not a big deal, it’s our dog Bentley. I mean, even on our website here, we’ve got Bentley. It is interesting. I’m not using Bentley as security password. I thought this was a fascinating tip.

We had a client who we were talking about all of this. She said, “When they ask those security questions, I don’t answer the question – I give something random.” For example, “What was your first dog’s name?” She’ll put in a month, February. You wouldn’t name your dog February, it’s a random word. She knows the answer, and that’s not on Facebook or any other social engineering.

As you think about your security questions, make it completely unrelated to the question itself, so that it’s a word that only you will remember. I thought that was a really interesting tip that can prevent that.

Vince: Another one of our clients had brought up a really great one at an event too. We had a cyber security event where we had a specialist come out and talk about how to protect yourself. Our clients seemed to love that one. They had some really unique ways of protecting things. One was the password was a phrase. It was the first letter of each word in a phrase that he would remember.

The capital would be the words that were supposed to be capitalized in that sentence. If it was America, it would be an A or the first letter, the, that would be capitalized. He only took the first letter of each of those. It was easy for him to remember what the phrase was but to anybody looking at it, it’d be a random string of letters.

Patti: I’ve used that many times. As you know, in our industry, I’ve got 50 different websites. We have to change them every six weeks. They can’t be anything related to anything that we’ve done the last three years.

I don’t know about you guys but I am not that smart when it comes to remembering my passwords period, much less what did I do for the last three years. Phrases are a really good way of figuring a different way of providing that kind of security.

When you think about this, what are the top subjects? What are the ones that are really popular right now? You mentioned Microsoft.

Vince: Things going around right now, Netflix is a big one. Your account has expired, to continue viewing this great selection of movies click here and put your credit card info back in. It’s a fake website. That one’s up this year 25 percent more than it was last year.

Patti: What’s really scary about this – this is what we did with our seminars, we brought it up on the screen. The email has Netflix’s logo. It looks exactly like Netflix, what you would expect from Netflix with all the same colors, etc. You’d have to really do what we’re teaching everyone today and right click on that email address to make sure that it is legit Netflix.

Vince: That’s a really good point. You went through the exercise of bringing it up on a screen and showing the clients what was wrong with each of those emails or what was right and how to do it. If you’re not sure, ask somebody.

You held that seminar for people. It was great to inform them of that. If you don’t have access to go to a seminar where somebody can teach you that stuff, ask somebody. Ask your kids that are under 13. They’ll tell you exactly how to do it.

Patti: Right. We got to hope that our kids under 13 know how to do it and know they’re being taught about it too. They’re probably as vulnerable as anybody out there. They’re probably not thinking about it as much as we’re thinking about it.

Even more so, because of the information, you really want to protect your kids. There’s some nutbags out there. God forbid they get access to your kids, their information, their Facebook, when are they traveling, when are they home, etc. You want to make sure that you’re paying attention to this stuff and teaching your kids. What else is popular?

Vince: It’s actually funny how the things come in waves. They discover a flaw in security somewhere, and they’ll send out a ton around that area. UBS was surprising. That went up in the fourth quarter of 3,000 percent as an email subject.

Patti: UPS?
Vince: UBS.

Patti: UBS, the financial services company.

Vince: The financial services company went up 3,000 percent in the number of tax. During that same time period, then ones from the previous year that were really high up on the list, Bank of America, Wells Fargo, both dropped off. People got onto it that, “Hey, it’s one of those Wells Fargo scam things, emails going around.” They caught onto it. They switched and they started going after UBS.

Patti: You know, Vince, as matter of fact, I’ve got to tell you. About a month ago, my son Jack got a text message. The text message said, “Wells Fargo HTTP,” which has made him think that’s the URL Wells Fargo, “Your account has been locked. Click on this link to unlock your Wells Fargo account.”

Fortunately, Jack is very much aware. He texted me. He said, “Mom, what’s going on with my account at Wells Fargo?” He was wondering, he said, “Do I even have an account?” I said, “No, you don’t even have an account. That is a phishing scheme, completely ignore it, and block it for future texting.” Those are the kinds of things that you really want to be aware of.

You’re going to get these. Vince, like you said – I love the metaphor – they’re casting the line. They’re saying, “How many people are going to nibble on it?”

You and I both know this. I’m shocked at the people, really smart people. We’re all just so damn busy, “OK, let me just get this thing done. I’ll just click here and fix my username and password.”

We’ve had clients who are really high level, C-level executives, and they got scammed. We had another client who called us in a panic because their computer was frozen due to ransomware. They just didn’t realize what they were doing. This was, unfortunately, people who are getting older, etc. Their cognitive problem solving often declines.

That’s what we’ve learned from the prior podcast with the MIT work and the AgeLab. She was so panicked that she ran to the store and got the $8,000 worth of the debit cards and gave it to them to unlock her computer. When she told us about it, it was too late. They had already cashed that money.

Interestingly enough, with the ransomware, they will unlock the computer. They know if they don’t unlock the computer, nobody will pay the money. They want the money more than anything else.

Vince: They’re also looking at especially these large publicly trading companies. What’s the value of our stock if people find out this happened? How much is it going to cost us to put security in place to make sure it doesn’t happen? Sometimes it’s just cheaper for them to, “Here we go”.

Patti: Right. Exactly.

Vince: Here’s the 25 bitcoins that you wanted to unlock our data. Thanks.

Patti: It’s amazing. I know we spend a lot of money on security, on systems like 2FA, encrypted servers, and firewalls. For the listeners who are tuning in today, what should they be thinking about? It’s one thing if you’re an SEC firm. We’re even over and above what the SEC requires. We’re doing everything that Europe requires because we want to be ahead of the pack.

Folks, those of you who are listening, it’s so hard to be…Let me put it this differently. Don’t be too confident as it relates to this. A little, maybe a lot of paranoia is a very good thing, because it’ll force you to be that much more vigilant.

Vince: Well put.

Patti: What exactly would you say should the listener be considering doing, etc., in terms of protecting themselves?

Vince: The biggest thing whenever I read and research anything about cyber security make sure all our systems are ahead of the curve, make sure our procedures are lined up, is to really make sure that you’re following basic password security protocol.

Password1 with a capital P is not safe, nor is writing your really good password down on a Post it note. When they interview cyber security experts and they say, “What are the top reasons?” They interview 50 people. They come back and they say, “Here’s the top things.” 30 out of the 50 will say something password related.

Patti: Let me play devil’s advocate here and push back a little bit. What’s the big deal with writing it on a Post it note? Who’s going to steal that? Who’s going to use that? Is it somebody that knows you? Tell me more about that.

Vince: A lot of the stuff does come internally. We do background checks and all sorts of things on employees. If you’re working for a call center, for example, and you have your password, there you go. You just have access to someone’s internal systems and they’re going to be the one that’s blamed for it because it was their username or password that logged in to get client data.

It’s not necessarily that it’s the person you trust right next to you. In large companies, where it’s written down in places, they hire outside people for cleaning, they hire outside people for IT support. All those sort of things that happen, that Post it is just sitting around.

Again, they’re going to use that same username and password. They’re going to bump it into a bunch of other systems and see what else they can get into.

Patti: That’s exactly right, and it’s so hard to track it. It’s so hard to catch these people. That’s the hardest thing about all of this. How do you catch them? How do you know where the original source was? That’s what the regulators and the law enforcement are really dealing with.

I remember that, frankly, I talked in a prior podcast, this happened to my mom. You know what? They went to the police. The police said, “You know what? Where you’re down here, in Florida, they are literally, unfortunately, going after the elderly. You can stand in line with the other 300 people that have been in this week that also got raided.”

It’s a big issue, very difficult for law enforcement to go back to the original source. The most important thing is, you think about your health, prevention is key, Same thing with your money, prevention, make sure nobody can get access to it.

Vince: Probably the second most important thing, after we talk about the password stuff, is to make sure any site that offers what is called two factor authentication is in place. If they offer it, take them up on it.

Two factor authentication is really simple. You put in your username and your password to get in. Then you get a text message to your phone or a phone call to your home or an email that has an additional security piece that you have to then enter in that site to actually access it.

The idea is that it’s something you know and something you have. You know your username and password, and you have your phone. This way, if somebody does capture your username and password, they don’t have your phone to get that other piece of the ID to get in.

Enable that whenever possible. Don’t overthink it. The institutions that have put those things in, “Oh, it’s so much harder for me.” You can’t underestimate the level that people will go through to get this information that are out there.

Patti: Would it be safe to say, Vince, that if you get an email and it’s basically telling you something, as legit as it might look, don’t click on the link in the email. If there is a username or password, or something that you need to do, even if you see an advertisement.

I know I get advertisements all the time through email just because I was at the store, they got my email, and now I’m getting all these ads. Don’t click on that link because it may not be going to Talbots, or whatever store that you were at recently.

Go out of your email and go in through the regular way that you would normally go through the website. That way, you know you’re in the legit website. Also look at the extensions, right?

Vince: Yes, absolutely.

Patti: Let’s tell people, how do you do that?

Vince: When you get a link in an email, it’s usually underlined or in blue. If you right click on that and you hit “properties,” it’ll be in that drop down that appears when you right click on it. In some emails, depending on what company you’re using for your email, you could simply hover over it and it will give you the actual URL it’s going to, the website it’s going to. Look at those.

Again, as you said earlier and you were showing in that presentation you gave, they’re really close. It’s like Amazon spelled with two Os, Amazoon, or Google with three Os. They’re so close that when you first look at them, you go, “Oh, that’s it. That’s legitimate.”

Patti: Right because you want to get it done and you want to get it taken care of. Again, I’m at the point where I’m not clicking on any links. I’m going out and going directly to the site, and that way I know I’m safe.

Again, as I said before, I don’t know that we ever know that we’re truly safe. You can also right click on the email address as well, right?

Vince: That’s correct. That’s called spoofing, where you get an email. Let’s just say I got an email from you that says, “Hey, Vince. Give me a call about a bank deposit and I go, “OK, hold on one second. What do you need, Patti? I email back and you say, “Can you just withdraw $10,000 and send it?” No, don’t ever do that. Call the person.

They spoof the email address so it looks like it’s coming from that person. As you just said, right clicking on that and going to properties will actually tell you the email address it’s coming from. Some of the really good ones are very good at spoofing.

Even when you click on it, it says the email address. You have to actually dig deeper. Again, that’s the ask your 13 year old or your resident nerd in the office, that’d be me, “Hey, who did this really come from?”

Patti: You know what is really interesting about all this, Vince? I feel like we are going to go backward. Here we are in this digital age and I’m at the point where when you get an email like that, I’m going to say, “Pick up the phone. Call the company. Verify that they actually sent that,” because that’s really the only way you’re going to really, really truly know.

Vince: Yeah. When it comes to transacting money, when it comes to paying for things online and you’re going off of an email without actually talking to somebody, that’s not a bad thing to do.

Patti: Right.

Vince: Pick up the phone.

Patti: Pick up the phone. Just make sure. I think it was really interesting, we were talking about this. If there was an industry that our kids should be thinking about going into…

Vince: [whispers] Cyber security.

Patti: Cyber security, guys. Think about it. This statistic is fascinating. Approximately six trillion dollars is expected to be spent globally on cyber security by the year 2021. Wow, that’s an amazing amount of money and again, it’s constant. It’s like medicine. It’s always changing. These guys are getting smarter and smarter and we just have to be that much more aware.

Vince: It’s stuff that we don’t even understand yet. We just had one that we were talking about this morning about Huawei and the whole Android that Google is not going to allow them to use the operating system.

People are looking that going, “I don’t even understand how they would use that as an attack form, let alone why they would stop them when it’s all this money involved. There has to be something there, though.”

That’s an industry that is just growing and growing and growing. If you go to any site that handles cyber security or computer technology around security and go to their website, you will always find job postings.

Patti: You know what’s really interesting? Getting back to that cell phone thing, you think about it. I think the big risk is it’s a Chinese owned company and the worry with the government is they have the technology if they have access to Google and they’re able to access somebody’s search history.

They’re going to get a lot of information just from the manufactured phone and that’s going directly to China. I guess our government doesn’t want that.

Vince: Again, even more so with the infrastructure of the 5G networks.

Patti: Which is also an interesting thing. Is the infrastructure strong enough? Does it have the firewalls? Is it safe? Be wary before you go 100 percent into 5G. Make sure that the world is prepared for that.

Vince: You’re saying buy a flip phone?

Patti: Oh yeah, yeah, yeah. I think I’m done with phones period. You know what? Let’s talk to each other. How’s that for a concept?

Vince: I like that.

Patti: Vince, you have been terrific. Let’s think about the takeaways for our listeners today.

What I heard from you, what I hear from you every single day, is do not underestimate the enemy. These people are getting smarter and smarter and they’re coming after us. Passwords, don’t use passwords that are not random.

They can figure it out and they can get into multiple sites all at the same time. Don’t write them down. Don’t put them on a post it note. Last but not least, read your emails carefully. Right click on the email address. Hover over any kind of a link, or better yet, don’t even go to the link.

Don’t click on the link from the email. Go out of email and go to the website itself to figure out what might be going on. Plan B, pick up the phone.

Vince Kailis, thank you so much for joining me today. This was terrific, relevant, and important information to protect our listeners from attacks that are happening, literally, every 39 seconds.

Thanks to all of you for joining us today. I hope you found this interesting and helpful to you.

Please, if you want more information, like we said, I have a resident geek right here on staff. If you want to talk to Vince about your computers and maybe the different ways you can protect yourself, different software that can be used to protect your computer, give us a call. Go to the website, put in your information, and we can give you a call and give you some of these tips on a personal level.

In the meantime, I am Patti Brennan. Thank you so much for joining us today. We’ll see you in the next episode. Take care now.

Ep19: Selling Your Business

About This Episode

Have you done your due diligence to sell your business and get the maximum value? In part two of the series, Patti discusses specific strategies with Matt Coyne, President of Brandywine Mergers and Acquisitions. As a business broker, Matt reveals exactly what a successful sale process looks like for the business owner. There is a system with actionable strategies and defined pitfalls to avoid that will make the sale process a true success – listen now to find out!


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 can’t think of a better episode to talk about that than the episode we have today. We have Matt Coyne. He is president of Brandywine Mergers & Acquisitions.

Matt is a business broker. He helps people in the transactions, in the preparation of selling a business, as well as the entire sale process. In the first podcast, we talked about how to prepare your business to get maximum value. Just to tease you on that, for those of you who own businesses, you want to start this process three to five years out to really max out the value. Right, Matt?

Matt Coyne: That’s the ideal, yeah.

Patti: Let’s say that we’ve been doing that. We’ve got the financials up today, we’re looking at the monthly, we’ve got them on accrual basis, etc. Now we’re at the point where we really want to start looking at selling this thing. How am I supposed to find a buyer without anybody finding out my employees, my competitors? How do you go about doing this?

Matt: There’s a process and it’s the most important thing, because oftentimes people would come to me and say, “Well, I’ve already talked to some of my competitors about it,” and you don’t want to do that.

Patti: Why? Just out of curiosity, why is that?

Matt: The competitors will sell against you, for sure. By the way, most of my clients are really good, honest people who care about their people, and I’m sure the folks listening to this are as well.

They feel they need to take their people aside and talk to them about, “I’m going to put the business on the market,” like that’s supposed to put them at ease. Well, it freaks them out.

Patti: Oh yes.

Matt: Completely freaks them out and the good people leave, if they can. The people who can’t get another job elsewhere stays. It’s not good for the business.

For everybody involved, when you wake up in the middle of the night and say, “It’s time. I’m going to sell.” Some people, we set three to five years, that’s the ideal. The reality is most people, something happened in their life. They just buried a friend or they just decided, they had a meeting with their wealth advisor and they said, “Listen, if you can get X amount for it, you can retire.” “I’m in.”

First thing you do, don’t tell anybody.

Patti: You know, Matt, what I so appreciate you is that you really know your audience. You know your people. You understand. We’re going to be talking about ideal scenes here, but people are people, and that’s exactly right. There’s often a catalyst that makes someone say, “You know what? What am I doing? Life is short. Let me figure out what’s going to happen in the next season of my life.”

You might not have done that preparation. It’s OK. You still want to start.

Matt: Yeah, if you have prepared everything, it’ll be a smoother process. If you haven’t prepared, it doesn’t mean you can’t get through the process. You’re just going to have to be doing some catch‑up. The way you find a buyer, Patti, is by confidentially advertising the business.

In my line of work – as I said, I’m a business broker, an M&A broker – we run confidential processes. When we advertise a business, we will say, “Light manufacturing company, Southeastern Pennsylvania.”

Patti: It’s very generic?

Matt: Very generic. People will contact us. We’ll have them sign a confidentiality agreement before we talk about the name of the business. That’s how you do it. You can do that by hiring somebody like me. You can have your lawyer do that for you. You can have an accountant. You could do it yourself. I think you’re going to mention a book I wrote.

I actually put a chapter in that book on how to do this yourself. If you look at that, that’s why I did that. Some people are relatively small business and they have time, and they can do it themselves, but there’s things you have to know. For example, I’ll give you one example, you can’t send out something that has your email on it. It takes me about 15 seconds to figure out.

If you Google me, you’ll find out I ran a 5K four years ago. Even on my personal email, you could get back to my company in 60 seconds, or your kids could in 60 seconds, find out who I am. When you start a process, if you’re going to do it yourself, I use things like, “You need a brand‑new email you’ve never been used,” and “Gmail, it’s free,” those types of things. Confidentiality is absolutely the number one thing in this process.

Patti: That is such a great tip. A lot of people wouldn’t have thought about the email. Get a completely different email that’s not tied to anything that you’ve done before. That’s really key.

Since, Matt, you’ve brought it up, let me just highlight the book for the listeners today. The name of your book is “Straight Talk from the Front Lines.” Feel free to go to the show notes. You’ll find how to get the book from the show notes.

That is a wonderful thing to do for people who are listening. Just, “If you want to do this yourself, here are the dos and don’ts that you need to be thinking about.”

Matt: You’re going to find, if you go to sell your company, “I have some great competitors in this area, but not a lot.” It’s a very unique kind of niche. If your business is particularly small or you might have had some bumpy times, it might be hard to find somebody to represent you. You don’t need somebody. Look it in the book. If you have an accountant to help you, you can do this on your own.

Patti: For those of you who listened to prior podcasts, even though the name of your company is Mergers and Acquisitions, I always thought – silly me – that to go with Mergers and Acquisitions firm that you had to have a 5 or 10 million dollar business. In fact, that’s not the case, is it?

Matt: No, it’s not the case. For us, we’ll handle a company that’s making, probably for the minimum, it’s around $250,000 of annual income, or EBITDA, which we talked about in the last podcast.

Patti: Since you did that, just in case, why don’t you define EBITDA for everybody here.

Matt: EBITDA is kind of the international M&A term for cash flow. It’s your earnings before interest expense, before taxes, and before depreciation and amortization.

A buyer looks at your company. What they want to see is how much cash flow does this company throw off, as it is today before they pay taxes.

Most deals are tax‑efficient so the buyers can have a different tax rate. They’re going to borrow money to buy your company, so they’re going to have their own interest expenses. They want your cash before you paid interest. Then depreciation and amortization are non‑cash expenses.

When you come up with this EBITDA number, that is your number. Once, if it’s not every month, every quarter, you need to say, “My EBITDA is $500,000.”

If you put together a plan, God bless you if you do – most people don’t – but if you do put together a business plan people say, “My budget this year is to do a million in EBITDA.” No one cares about your net income. No one cares about a bunch of different measurement you use. When they come to buy your business, they’ll be talking about EBITDA.

Let me make one more comment on that if I can, Patti.

Let’s say you’re running your business and we talked about growth in the last podcast. If you say, “If I bought a new assembly line for a million dollars, I could double the size of my business.” I’ll ask you, “What is the impact on your EBITDA?” You might say, “It’s going to cost me millions and my earnings are going to drop by a million.”

That’s not true. You’re going to borrow the money to buy it. It’s not an expense. It’s something that’s on your balance sheet. You get to add back the interest expense.

So long as you’re willing to take the risk, it’s not going to impact your EBITDA. It’s those types of discussions we can’t get too deep into it now. When you put together a business plan have your financial advisor, controller, or your accountant go through this with you, because what you’ll find out is you can put money in your business and double your value – and do it pretty easily.

Patti: Just to keep it really simple, as always, EBITDA is always higher than your net cash flow because you’re adding those things back in.

Matt: It’s higher than your net income, but it should be similar to your cash flow.

Patti: Exactly. It’s so interesting because we confuse the terms – cash flow versus net income – and they really are not the same. What the buyer wants to know is, “What is your real cash flow?” That’s the key.

Matt: That’s the key. Cash is king. You might have the most beautiful building, the wonderful product, incredible potential. “What’s cash flow?” If it’s such a great product, there should be cash flow.

Patti: Let’s say that we’ve got a business owner and they’re running their business. Now people are approaching them. They’re getting emails. People are saying, “Hey, if you’re ever interested in selling, talk to me first.” What should they do with those kinds of inquiries?

Matt: That’s a great point, because people will get them, especially in a market like today. If someone’s interested, I would have your lawyer draw up a two‑way confidentiality agreement and get a confidentiality agreement in place. I would talk to them.

I wouldn’t go sending over a bunch of information. I’d have lunch. I’d say, “Next time, we’re at a trade show together, let’s sit down and talk.” See what they have in mind because they may be the best buyer ever.

But they approached you so, once again, it’s not an issue of your people saying, “You’re selling the company?” Say, “No, I’m smartly listening to a strategic possibility.” That’s it.

Patti: You know, if nothing else, you might uncover some ideas in that lunch that you weren’t doing or weren’t aware of. Again, I’m always about this process, can just make you a better business owner – period. I think that that is a really important point, just go ahead and have lunch.

Matt: Watch the professional sport team. They do it all the time. When somebody wants to talk to you about strategic matter, remember you have two ears and one mouth. You’re listening. They’re probably going to tell you what their plans are, and hey, if my competitor wants to tell me their plans, I’m up for a burger.

Patti: There you go. Absolutely.

How do you tell between a good offer and a not so good offer? Is there rules of thumb? How do you go about evaluating different offers?

Matt: First thing, you want to see it in writing. Some people will talk about “Oh, we talked about this, we talked about that…” If somebody wants to talk to you about buying your business and they sit down, let’s say it’s at that lunch. “Yeah, we’d be interested in paying you. We pay a high multiple. We pay six times.”

You’re sitting there thinking “Oh, that’s six times…” What did you hear? You heard “Six times my best year ever. All cash. 30‑day close.” That’s what you heard. That’s what a business owner would hear.

I generally say, I’m flattered, thank you. I think maybe we could do something together. If you could put that in a letter of intent or term sheet…Those are the two terms you need to know, letter of intent or term sheet. Term sheet is even like a single page – that I can share that with my wife and my accountant. Could you do that?

That will save you so much trouble. Because what’s in there is the answer to that question. That six‑time multiple? Assumed it was zero‑down at closing and paid over ten years. Not the same offer.

That’s how you do it. You take that piece of paper, and then you go to your trusted advisors, your wealth advisor, your accountant, your attorney. Frankly, any of them can help you. Go to the one you trust best.

I’d go to your wealth advisor. Because your wealth advisor can then put that into your financial plan and, based upon the timing of the payments, it might be perfect for you, it might not work.

Patti: It’s interesting, because that’s what we do, we always run the numbers. We look at best case, worst case, as a transaction begins to evolve just to make sure that, if things begin to break down, or during the negotiations which…it’s probably going to happen…you’re probably going to be giving some things up…You could be. Let’s make sure that it’s even worth going through the process if you’re getting three or four‑times instead of the six.

Matt: When people come and approach you and want to buy your business, that’s your single‑best negotiating position, so don’t be so quick to push that out. But recognize that’s why I have the confidentiality agreement in place. That’s why we have your attorney involved. You’re going to have to share some financial information. They’re not just going to make up a number.

There’s a certain level of information that’s appropriate. Your reviewed annual statements, maybe your tax returns. Don’t forget to black out your social security number if you give them. They need those to understand the profitability of the company.

Sometimes people come to me and they’re like, “Can you imagine what those people asked for? They wanted my tax returns.” I’m thinking “Well, they were probably taking them to take to their bank to see if they can fund the deal.” You do need your trusted advisors to look over your shoulder and give you some help. You are going to have to share some information before you get an offer, just know that.

Patti: What does this whole process look like in terms of time? How long does it typically take and what is the due diligence that’s involved? What’s the buyer going to want to see? Who’re they going to want to talk to? What’s the timing even of all of that?

Matt: That’s a good question. Soup to nuts, six to nine months. If somebody walks into my office today and says, “I want to sell my company. I’m relatively well‑prepared.” Let’s assume they haven’t done three to five years, but their stuff’s pretty good. We’ll take about a month to package it. Then we will confidentially market it for another four weeks.

Marketing is very efficient when you use a professional because we know how to get to the buyers. We have databases so we send out a very basic teaser. “Southeastern Pennsylvania Manufacturing Company.” By the way, what are the sales, and basically what is the EBITDA. That’s what a buyer needs to know. they call us, they sign our confidentiality agreement, we start into dialogue with them.

Ultimately, they’ll want to meet you, but first they will have a dialogue with them. Then, we might have a conference call, and we’re working our way towards a letter of intent. They’re going to give you a letter of intent, and the one thing it’s going to say in there is “Here’s the price, here’s the terms, etc.” We’re going to negotiate that and then we’re going to sign it.

Now we’re into due diligence. If you haven’t been through it before, you will hate it. I had root canal earlier…This is better. Root canal was better than due diligence, I assure you, because people are going to challenge everything you’ve ever done in your business. Expect to be offended. Expect to be challenged in your judgment. “Why did you do that?” “Why did you change accounting policies?”

The buyer’s job is to find problems. They’re not there to pat you on the back. That can take up to three months. A lot of that is “How good are you?”

Now, let’s say, for example, Patti, you don’t have a financial controller. The buyer wants all kinds of financial information. Well, you’re going to have to come in and get the financial information for them.

Let’s say you have a controller but you don’t want them to know about the process. That’s totally up to you. That depends on how well you trust your controller. By the way, if you tell one person, you tell your controller.

Patti: Very good point, yeah. That’s very, very important.

Matt: If that person can help turn around documents…I’m going to get requests for five years of cash flow statements, five years of balance sheets, all this type of stuff…if I get all that information to them…

By the way, we deliver all that electronically in a secure deal room. We populate the deal room and then the buyer starts looking at it. That whole process, say three months, and then it’s done.

You asked a question about if they want to talk to your employees. Most offers include a desire to speak to key employees, key customers, key suppliers, and you look at that and say “No way.” Well, here’s the “way” because sometimes they’ll say “Well, we’re not going to buy it.”

If a buyer is a private equity group or a big public company, for example. These are people, by the way, who have a job. They are not business owners. They will lose their job if they do the wrong deal, so they’re very risk‑averse.

So, when do they talk to your employees in the process I just talked about? You have a letter of intent, we went through due diligence, then we get to an agreement of sale. That’s when the lawyers negotiate the purchase and sale agreement. Once that agreement’s done, then we’re really close to closing.

I put in that agreement, “This agreement is subject to a discussion with my key employees, discussion with my key suppliers, and my key customers.” That happens the week of closing.

Patti: I can understand why they would want to talk to your key employees and I’m curious at what point you tell your employees that you’re selling the business, we’re in that process. Why would they need to talk to their customers?

Matt: They want to make sure the key customers are not going to leave when they take over, and it’s a fair point. Also, if your business has contracts with some of your key customers, there will be assignability clauses in there, where you’ll actually have to approach the customer and say “I’m selling the business. I need your approval to assign the contract.”

If that happens, once again, let’s take off the table everything we can. We did the due diligence. Are you satisfied with the books and records? Yes. Is the bank onboard, are we ready to be funded? Yes. Is the agreement of sale done, my employment agreement done, the seller note done, the lease done? All the stuff the lawyers have to do is done. It’s in a box. Then we say, “We’re ready to close as soon as we check these last boxes.”

Two things happen. One, leave a very short timeframe for people to get freaked out, which is very important. Two, the buyer, if they’re a private equity group, just probably dumped $200,000 into the process. They’re only backing out if it’s really, really bad. If your biggest customer says, “Patti leaves, we’re out,” then you’ve got a problem.

By the way, I don’t know how you defend against that. Well, I do know how you defend against that. You don’t leave. If part of the deal is that Patti’s staying for the next three years, then your discussion with them is, “Hey, I’m going to retire in a couple of years and I’m going to get funded by this new private equity group that’s going to become my partner,” because maybe you own ten percent of the company.

Now, you’re telling the truth and nobody’s freaked out. If you say “I’m out of here, I’m going to Florida,” is that customer going to stay with you? It’s a good question.

Patti: When you think about the deals that you have done, on a percentage basis, what percentage did you find that the owner stayed there for a period of time after the deal closed?

Matt: There’s two answers to that. One is there is a transition period of two months. Show me where the light switches are. That’s more and more rare. Most of the time, it’s a year to three years. I had one guy, a good friend – became friends – he had told his father almost on his death bed that he would not work past 65 and he was 64.

We fought like heck to get him one year. They offered him, I’ll make up the number $300,000 a year for three years. He said, “I don’t want the last two. I’ll take the first one.” They didn’t call him after a week. We would have lunch and he’d say, “You know they would be paying me now if I’d just said yes.” Because all they wanted was access to him. They just wanted to be able to go to him if they got into trouble. He was that smart.

If you’re a business owner out there and they want you to stay for two to three years, it’s not how long, it’s what they want you to do. They might want you to go annual trade show, they might want you to take people to the Masters every year. I’m good with that.

Patti: I am too. Sign me up.

Matt: Exactly. You want me to come in open the doors every day, that’s a different story. What we’re talking about, Patti, is risk. If there’s any risk of the customers, the suppliers, the employees and you don’t go anywhere, your risk profile dropped dramatically. That’s why I want to be talking to people that are 58 opposed to people who are 79. So you have some window there to play with.

Patti: I think it’s so interesting, Matt, to talk through the preparation process and the sales process, the due diligence. Really warn our listeners that as you go through, especially the due diligence, you’ve got to have some humility. It can be painful. They are going to pick this thing apart and try and figure out a way to negotiate the deal down during the process.

Matt: You say negotiate the deal down. Sometimes yes but sometimes no. A private equity group is an investment vehicle. So picture, there are limited partners that have put their money into this pot. They’ve hired people to do their jobs and to find them companies.

Those people have a fiduciary responsibility to ask all these questions. They’re not just trying to be difficult but they have to report back to these folks. They’re going to go back and make a broad presentation that says, “I bet my job on this deal.” When they get stuck on a point, it may very well be a point they just need to get an answer to.

Don’t be offended by it. Do not go into this defensively and you’ll come out the other side. Just be prepared for a battle. The more work you do upfront the easier the process is going to be. It’s not a fun process. But on the other side, that’s one of the things we talked about. What’s on the other side? We talked about some of the key things to think about.

One thing I always challenge people to do is to think about the other side. If you don’t have a vision of what you want to do or what you were going to do afterwards, I don’t have many people around there that can remember when they did not work. You’re now going to not work.

Patti: Oh, Matt, we have this conversation all of the time whether it be selling a business or retiring. Tell me what that looks like.

How are you going to be spending your day? What are you going to do when you wake up? How much golf can you really play? Where did the grandkids live? What’s that look like for you? What are your hobbies? Is there any non‑profits that you’re passionate about?

To really make sure that they’re prepared, not just financially, but psychologically, because it’s a major, major transition. It’s a major shift in a person’s life.

Matt: When you get into the real tough part of due diligence and you’re scraping back‑and‑forth, and the lawyers are yelling at each other…Not that they yell, but they’re defending you. You could look and then say, “Why am I even doing this?” You need to remember that.

There’ll be people you’re doing it for. Those are your employees, those are your customers, those are your suppliers. If you don’t have the energy you had at one time, you’re doing the business a disservice and your family. You just have to keep your eye on the prize.

It’ll take you time to after the close till when you can really settle down into your new life, but don’t be afraid to dream, because that will help carry the day.

Patti: I think that also, it’s also OK to have a feeling of ambiguity, of a little bit of fear. That’s OK, that’s perfectly normal. Just focus on what your life could look like if you’re no longer running this business 24/7.

Let’s pull this together, Matt. In terms of action items or takeaways. Number one, what I heard from you is when you’re thinking about this and you’re beginning the process, do not tell a soul. That could really hurt you in a long run.

Matt: That with the exception of one of your trusted advisers to help you with it, yeah.

Patti: Exactly, exactly. Number two, be flexible. Have some humility as you go through this process. You may have a particular number in mind, or a process in mind and just understand that if you’re working with a business broker or someone who’s specializes in M&A, they’ll kind of walk you through what’s realistic. Understand that you’re going to be flexible. It’s just part of the process.

Last but not least, my favorite part of what you talked about today is to have a vision. Make sure that you really spent some time with your significant other, you spouse, your family, and talk about what this is going to look like once the business is sold, because you don’t want to be subconsciously sabotaging the deal.

As you get into it, you’re thinking, “Well, this is my legacy. This is my life. I’ve spent 30 years doing it.” And you find ways to kind of make the whole thing derail. If you thought about it in advance and you’ve allowed yourself to dream, it just makes things go so much easier, doesn’t it?

Matt: It does. It does, and it’ll carry you through.

Patti: Fantastic. Matt Coyne, I can’t thank you enough for being with me for both of these podcasts. I don’t know about you all who are listening to this. I got a lot out of it.

Again, let me remind all of you. I, personally, when I talked about selling a business, etc., I have no intention of selling. It’s just putting myself in your place to understand what the process is all about. If you’re having fun and you enjoy your business, by all means, keep doing it.

There will always be a point in a person’s life where you have to think about, “Gee, what does this look like when I’m no longer willing or able to continue running this company? How do you get maximum value? Who are the players that you need to put into place? How do you set up your financial so that you get maximum value?” That’s what we’re talking about here.

So that’s it for today’s show. Thank you so much for spending some time with us. Your time is so valuable and the fact that you continue to tune in week after week, it’s just…What a compliment it is to all of us! I’m so happy.

The feedback that we’re getting is terrific. The topics seem to be resonating for everybody. For those of you who have gone on our website at www.keyfinancialinc.com, you’ve given us your commentary. That’s what led to many of these subjects and these podcasts. We really want to talk about the things that you want to hear about in very clear, actionable ways.

So folks, that’s it for today. I am Patti Brennan. Thank you, again, so much for joining us. We’ll see you in the next episode.

Ep18: Preparing Your Business For Sale

About This Episode

How often have you thought about selling your business? There are specific strategies you need to know to set your business up to get the maximum value. In part one of a two-part series, Patti sits with Matt Coyne, President of Brandywine Mergers and Acquisitions, as he reveals what business owners should be thinking about and acting on right now to make their business as attractive as possible to potential buyers. Whether that time is now or five years from now, these strategies need to be put in place now to maximize the value later!


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 life.

I am so excited about today’s show. We have Matt Coyne with us today. Matt is the President of Brandywine Mergers and Acquisitions and we’re going to do this podcast actually in two bites. We’re going to have two programs, where, today we’re going to be talking about the preparation process. How do you set your business up to get the maximum value? What are some things that you should be thinking about?

And then the second podcast we’re going to be talking about the actual sales process itself, some of the dos and the don’ts. I think you’re going to get a lot of it.

I certainly have. I’ve known Matt for many, many years. He’s done incredible work for many of our clients who own businesses and sold them as a result of Matt’s wonderful expertise. Matt, welcome.

Matt Coyne: Thank you. Happy to be here.

Patti: Basically, we’re talking about the preparation period. How would you define that? Is there a particular time period? How long does it tend to take to prepare?

Matt: Most people would say three to five years. In a perfect window, you’ve got three to five years to get your stuff together. I will tell you right off the bat, most people I’m working with did not do that.

Patti: That’s really interesting. I’m thinking to myself, “Wow. Three to five years?” That’s really visionary. It’s really thinking about, “Boy, where do I want to be three to five years out? 10 years out? Really, for us, that’s part of the natural conversation, Matt. We are talking about financial planning and optimizing a person’s life.

Where do they see themselves in three years? In five years? In 10 years? Invariably, for us, the conversation typically comes up, but I would agree. For clients who are coming in, in their 60s, they own a business, and pretty much, they’re coming in, and they’re scratching at the wood saying, “OK, I’m really done. I want to be done with this thing.”

It’s really interesting to have those conversations because a lot of people don’t know what the value of their business is and don’t think that they’re going to get any value from it. Oftentimes, I find myself talking them out of just closing shop.

Matt: Yeah. When you’re dealing with a wealth advisor, and you’re unique in your shop in that you’re thinking about this, because in a lot of cases for business owners, this is their biggest asset. Some people think it’s a liquid asset. It’s a liquid asset if you work on it. Otherwise, it’s illiquid.

Patti: Boy, you’re not kidding, and I agree with you, Matt. A lot of people make that mistake. They put all of their resources into building the business, and they underestimate the amount of time and effort that it takes to actually have that liquidity event where they’re selling it for full value.

Matt: In my line of work, people hire us. My firm, what do we do? People hire us to help them find a buyer and sell their company. It’s inevitable that when someone comes to us they tell us that story about the phone call they got five years before when the greatest buyer in the world wanted to buy them, and they weren’t ready.

Now a lot of them weren’t ready because they just didn’t have their ducks in a row. Their financials were not really great. They just promoted somebody. The thing we hear from a lot of people I still have kids in school. They say, “Well, when my daughter graduates, then we’re going to do this.”

Everybody has kind of this plan, but what I would say if you’re, I’ll use age 55 let’s say for example, and let’s assume everybody…65 is the day that they want to get out. If you’re 55 and you own a business, it really should be ready to sell.

Because someone may come along and want to buy you, and they may want you to stay for a couple years. They may be the best buyer.

Frankly, we’re in a great market right now. How long is this going to go? I don’t know, but there’s probably a bit of a downside to M&A and then it’ll pick back up. If somebody is a couple years away, it’s time to be looking hard.

Patti: That is great advice. Assume that there is a buyer right around the corner, that you don’t know about yet, that’s going to give you more than you ever expected. You want to be ready for that buyer.

Matt: It happens. It’s circumstance. It means somebody entered the market and wants your place. It’s like someone walking up your driveway and wanting to buy your house for 20 percent.

Now, is that going to happen? Not to everybody, but it does happen to some people. When you’re not ready and you say no…It’s a lot easier to get a date to the prom when someone asks you than asking somebody. I use that analogy. It seems to work.

Patti: It works really well. It certainly works. Now, when I think about the name of your company, Merges and Acquisitions, I think big companies, major industries, etc. Tell more about that. Is it Merges and Acquisitions? Is it small businesses? Who’s coming to somebody like you?

Matt: All right. For us, we play it, we’ll use the term the lower end of the middle market – which is a ridiculous term really – but it’s one that we work with. An investment bank will come down to about a $3 million…

We’re going to talk about EBITDA. EBITDA is a term we use in mergers and acquisitions, which is basically annual cash flow.

Patti: Why don’t we define that for our listeners because I think so much is dependent on this EBITDA, and it’s foreign to a lot of people?

Matt: It’s Earnings Before Interest, Tax, Depreciation and Amortization. It’s a calculation if you take your tax returns and look at the bottom line profit there. Take the income pre tax. Because what it is, it’s so a buyer can look at it and say, “OK, how much cash flow is this company throwing off?”

Depreciation and amortization are non cash expenses, so they come off. Then they’re going to borrow money to buy the company, so they’re going to have their own interest expense. They don’t want to confuse it with yours.

Obviously taxes, a lot of these are tax efficient transactions, so they want to come back to this cash flow number. Anybody’s accountant can calculate EBITDA for them, but you should know that number.

We’ll probably talk a little bit about valuation, either in this or in the next podcast. When someone walks in the door and says, “I’m willing to offer three to four times,” they don’t have to tell me what they’re offering three to four times of. It’s EBITDA.

If you don’t know what your EBITDA is, you need to find it out. That’s very important. That’s probably step number one. Anybody listening, figure out what that is for you.

Patti: You mentioned about multiples, and I know that’s really the way it works, multiple of the EBITDA. Are there some industries that get a higher multiple than others? For example, are there industries that get six to seven times EBITDA? Or is it basic business?

Matt: There’s two factors that come into play. The general answer to that is no. Over a period of time, no. Right now, for example, healthcare seems to be getting a higher multiple. That’s a trend. These are going to come and go over time.

Patti: Now, when you mention healthcare, are you talking about healthcare companies or doctors’ offices?

Matt: Doctors’ offices, people who are involved in, unfortunately, substance abuse. Those types of businesses are getting…Let’s say, for example that industry, substance abuse.

There are some very large players coming onto the scene. It’s a fragmented industry, so the big boys are coming in and buying up these properties. For a period of time, they’re getting a better multiple. Once those folks are established, they’ll be opening up their own branches, if you will, so the multiple’s going to drop off.

Historically, has that been a higher multiple? No, but it is today.

Patti: That is really interesting. As you’re listening to this, folks, think about your industry and see where you might fit in terms of the popularity. Is this a space where the big boys are wanting to come in? I can tell you that, frankly in my own industry, there are a lot of big companies that are looking at firms like mine.

By the way, I have no intention of selling. They’re going to take me out feet first. But it’s really interesting to see what’s happening in our industry, because they see it as a really important service and important business that is actually growing much faster than a normal business.

What I think is interesting is that, in spite of this being the digital age, what’s happening is more people are hiring financial planners, real financial planners, than ever before, because they want that human connection.

As a result the independent RIAs, Registered Investment Advisors, are probably in that space where they’re getting higher multiples, because this happens to be a period of time where good quality advice is sometimes hard to find.

Matt: For example, if somebody comes in and contacts you and wants to buy your business, and you say you’re not ready but they’re serious, they’re going to go next door.

One of the downsides of not being prepared for selling your company is when that great buyer walks in, and you’re just not ready in your personal life, you may now be lining up across the line from them in the year after they bought your competition and pumped some money into them. There’s an offensive and a defensive play.

Now, if you’re 40 years old and you want to work till you’re 65, you’re not interested. But my clients, I have clients in their 90s, I have clients in their 80s, a couple in their 70s. That’s not the ideal client that you want in this situation. You want to be where you can stay on board and continue to rock and roll with the buyer and help them grow.

There’s a difference between how businesses used to sell, and how they sell today. They used to sell where – or people think – someone will come in, buy them out. They shake hands at closing, money comes in, we’re done.

That’s not the case. The vast majority people who sell today are remaining onboard.

Patti: That’s very interesting, and I agree 100 percent. In the transactions I’ve been involved in, that’s exactly what happened. For the sellers, that’s what they want to have happen as well, because they’ve got relationships with their customers and their clients, as well as their employees. They want to make sure that the new buyer is going to treat people the way that they have.

They want to have that transition period of time to make sure that they’ve really made the right decision.

Matt: A lot of it comes down to your state of mind. If you’ve been running a company by yourself for 25 years, you need to think, “My last few years, I’m going to be here and I’m not going to be the boss.” That may be the best estate planning – I would argue that we, both of us, play a role in the estate planning world. Our clients are kind of the baby boomer types.

If somebody comes in and sells their company, say to a small private equity group, and stays on board to run it, God forbid something happen to them. Their heirs, their spouse, is not going to inherit this business. I’ve worked for a number of estates last year. It’s a very painful process.

If somebody else owns the company, and you’re running it for them so you’ve taken your equity off the table and you’ve invested it with Key Financial. You’re done on the financial side. Now you’re running it with someone else’s checkbook. It can be fun by the way, and you might get a salary, which is also interesting. So you run this until you don’t want to anymore.

Patti: It’s perfect. It is exactly right. It is really the way that it should be done in terms of selling the business, and making sure that it is a sustainable business for the next 30 to 40 years. That’s really what business owners want.

Matt: With that two to three year transition, it works perfectly, but I will tell you this. People go kicking and screaming. I have a lot of late night conversations with people, saying, “Listen, you just got to put the ego to the side.” I do this not right off the bat but when we become friends, over a period of time. We’ve been through the process, they’re having questions, I say, “Listen, this is the right thing, for your employees, for your families, for your customers.”

All that type of stuff. It is a process of separation which is painful. People should not underestimate that.

Patti: That’s a really good point, and that’s what really makes you stand out in my mind, because you recognize the psychology involved. Which is really powerful because in the end, that can sabotage the deal. Truly.

So I’m curious. Who are the buyers, Matt, who are the buyers and what are they looking for?

Matt: It depends on the size of the business. We’ll go back to EBITDA number. If you’re making a couple hundred thousand dollars a year, you’re going to sell to an individual. Simple as that. If you’re a mom and pop business, another mom and pop. Probably a younger mom and pop coming in, take over the legacy. They can do that with an SBA loan. Very straightforward deal.

Patti: By the way, this country has been built on moms and pops. Small businesses are really important, they’re an important part of this economy. Don’t underestimate the value of whether you’re a seller or a buyer look at that small business, because small businesses become big businesses.

Matt: As far as our practice, a certain portion of our businesses are that size. We get our work from folks like you, so some are smaller, some are larger. Let’s say a company doing $250,000 is going to be purchased with an SBA loan by an individual. They’re always there.

Patti: And 250 is the EBITDA?

Matt: 250 is the EBITDA, thank you for catching on that one, because we just talk with these numbers.

Patti: So often we confuse income with EBITDA and they are very very different numbers.

Matt: That’s one set of buyers. I think what’s most important for people who are listening to this, whose company might generate a half a million dollars of EBITDA per year and higher, the most likely buyer’s a private equity group. When I was in school, ‘89 I graduated, University of Vermont, go Catamounts, there were 50 private equity groups, give or take.

Patti: Wow.

Matt: There’s, I think, 3500 now. It’s been a very successful investment tool for investors, and it’s been very successful way for business owners to exit. So it’s here, it’s not going anywhere. It’s moved down into the smaller businesses. I’ll say for us, typically businesses that make $500,000 in EBITDA per year, up, are available for this funding.

Here’s what a private equity group, go ahead…

Patti: It’s really interesting, as you’re talking I’m really surprised the private equity firms are going that low. I would have thought that private equity would start at $5 or $10 million of EBITDA. They are actually going downstream.

Matt: They look at two things. If we’re a private equity group, you and I. We’ve got $10 million, we found our wealthy neighbor who gave us $10 million and said, “Go invest it.” So we are now a private equity group. We’re going to go out, we’re going to buy our first business. We’re going to buy a bigger business. Maybe one with three million of EBITDA.

That’s our platform. Once we’re done with that, then we’re going to do add on acquisitions around it. That is where most of my deals that I represent, are add on acquisitions. One that we have a client in common. That is an add on acquisition to a fairly large company that was purchased.

Patti: So the add on acquisitions are within the same industry of that base company that they originally bought. Is that correct?

Matt: Exactly. You’re right, your view is, a lot of private equity groups do very large deals. Once they buy a company for $50 million, they will buy the next one for 7, and they’ll buy another one for 10, if it has the right geography, maybe new brand. They can pump money into that and build it.

That is the type of buyer that a lot of businesses – I would say if you’re not making bottom line in your pocket a half a million dollars a year before tax, that’s probably not going to work for you. That’s a lot of people above that that don’t think that a private equity group would come to them.

If you’re going to play with these folks, these are financial buyers. They need a quality of financials that a lot of my owners don’t have. A lot of my owners hand me their tax returns. That’s all they do, once a year, tax returns. They are on cash based accounting. They book revenue when the check comes in, they book expenses when they pay the bill.

That’s not how it’s done. Most private equity groups want 36 months of trailing EBITDA. That means you must close your books every month. You must be on an accrual based accounting. If you don’t have that, listening out there, don’t panic. We just did a deal where we had books and records that were cash based, not closed every month. The buyer went back and recreated 36 months of financials.

They were that good. If you’re not that good, that was an exception the buyer made because they really really wanted this business. They got lucky.

Patti: What is the difference between cash and accrual? Why would a business do one versus the other?

Matt: They’re looking at trends. Most financial buyers are going to be borrowing money to buy the company. They’re interested in steady cash flow. If you have cash based accounting, you might do a $600,000 deal in October and nothing in November, but then you paid all of your insurance in August. You’ve got these expenses and these revenues that are up and down all over the place.

When you go back, and you look at month by month profitability, it’s distorted.

Patti: I see. It’s very lumpy, it doesn’t really tell the picture.

Matt: At the end of the month…you need to close your books at the end of the month, and accrue for payroll. Let’s say for example two days of payroll fell in one month versus the other. Your accountant will know exactly what to do here. What you want are accrual based books. It’s not hard to do, and by the way at the end of every month, you’ll know if you made money or not.

Patti: That’s very interesting. When our listeners are doing their books, can they have their accountants just prepare it both ways?

Matt: It doesn’t even need to be their accountant. Their accountant’s probably going to need to…

I’m assuming most small businesses do not have a controller. If you have a controller they’re doing this already. They close the books every month and they tell you Patti, here’s how we did, and you can go through that.

Every business owner should do that. But if you don’t have that in place right now your accountant can help set up processes so you start doing this.

Because when someone comes in and wants to buy you, when I say people said they weren’t ready, because their books and records, they didn’t close every month. And the first thing they found out was, our books and records aren’t good enough for this wealthy buyer and that’s a sin.

Patti: You know, you said something Matt that I think is really important for our listeners to pick up on, and that is you should probably be doing this anyway. What I think is really valuable, for everybody listening today, is if you own a business, if you’re running a business, setting it up so that you’re ready for a sale is just good business.

You become the owner of the business, not the practitioner. You’re not running a practice; you’re running a company, and therefore, you just make better decisions. As you think about this process, again, even if you’re not even thinking about selling it, it’s a really important step to really running it the way it can and should be run.

Matt: The better you do preparing for this, your books and records. We haven’t talked about personable. It’s some of the things that people really need to do start to delegate some of your stuff, put things down in writing, that are in your head. As you do this, what I think business owners, and I’ve seen this happen, people that plan couldn’t stand their business, and they started planning to sell it, they actually liked it. They didn’t sell it.

Patti: It’s interesting, because all of a sudden, they were able to delegate all the detail stuff, all that stuff. They’re focusing now on the things that they’re really good at, that made them successful in the first place.

Matt: Or, they’re not there.

Patti: That’s better.

Matt: I had lunch with a client of mine. I asked him if he was going back to the office. He said, “That’s very presumptuous of you.” I said, “Why?” He said, “Do you think I came from the office?” He just didn’t go because he had people in place, so to find him a buyer was just, it was easy. I didn’t have to replace him.

Patti: Exactly. And that is the most important thing. You really want to make it so that you become as a business owner obsolete.

Matt: Yes.

Patti: That other people are stepping in and doing all the things that you’ve been doing all along.

Matt: Absolutely. That’s what it’s all about because I can’t replace you and the risk factor…you understand risk and return, right? The risk factor of a business that has an owner and the two top people are their children, and nobody else has any authority is a huge risk.

That really needs to be third party professional management or children that are going to stay but are committed to the process or committed to stay for a buyer.

Patti: Are there any other things that the business owner can do to maximize the value? Is it strictly based on the financials and getting the financial house in order or, as you just said, running the business a little differently so it becomes less dependent on them being there?

Matt: There’s probably one value driver and that’s growth. We talked about let’s get our house in order, the books and records are good, it runs like a professional company. Now we can have a toe to toe conversation with a serious buyer.

Why are they going to buy you? Why are they going to go leverage money to buy you? That’s so they can grow it. I know I folks that are in their 60s and 70s, and they’re not going out to start a new brand.

It’s not going to happen, but they need to keep the dream alive. They need to diversify. If you’ve made all of your money off a two client, and they put all of your kids through school and bought that nice beach house for you, that’s great. Thank them very much, but they will not necessarily transition to the new owner.

What I’d rather see people do is diversify your customer base. The big issue we have with small companies is too much concentration, one or two suppliers, five customers. You’re struggling to sell at that point. As you get closer to closing or closer to selling your business, you want to diversify.

Let’s say you start a brand. You’re thinking, “I really don’t want to run this.” Don’t think about it. Don’t think about you running it. Think about what the market wants, what the customers want, and what will grow.

If you come to me and say, “Yeah, I think we’ve got a good five year growth plan ahead of us,” that’s what buyers want. They want growth. They don’t want stagnant. If you can’t grow it, why should they be able to?

Patti Brennan: Very good point. Really important point. Think about the things that you can do to grow the business. Give me some numbers, Matt. Is it 10 percent growth, 15, or is that also industry specific?

Matt: I see a lot of private equity groups that would like 20 percent growth per year, but let me put it this way. If we could find a lot of companies to sell with real 20 percent growth, that’s a little bit aggressive. I think it’s 5 to 10 percent growth.

A lot of people that come to me are actually on the decline because they’re enjoying their grandchildren, they’re vacationing more, which is great, but the business is starting to fail. Underneath them, it’s just eroding slightly.

Then when you start to go into a sale process, and people start to pick holes in it, you could start to see that the fundamentals are going away.

I see a lot of private equity groups that would like 20 percent growth per year, but let me put it this way. If we could find a lot of companies to sell with real 20 percent growth, that’s a little bit aggressive. I think it’s 5 to 10 percent growth.

A lot of people that come to me are actually on the decline because they’re enjoying their grandchildren, they’re vacationing more, which is great, but the business is starting to fail. Underneath them, it’s just eroding slightly.

Then when you start to go into a sale process, and people start to pick holes in it, you could start to see that the fundamentals are going away.

Patti Brennan: That is exactly right. You really want to prepare. Again, we go back to that earlier stage, 55 and above, to get that runway so that you are in that momentum mode to make it more attractive for a private equity or another buyer to say, “Wow, you’re growing at 15 percent per year. I could step in and do the same thing and 20 years from now look at what this business is producing.”

Matt: When someone is considering the sale process, think about their energy level. That’s going to gauge what you should do. I’ll give you an example.

I used to run a foundry in England. Our pension program was based upon your last three years of work. Picture this…Yorkshire, England, where it rains all the time. Love the people but the weather, not so great. On a sunny Friday afternoon, to get someone to work overtime, almost impossible.

The only people that I could get to work overtime were those who were ready to retire because they knew those last three years meant everything. For a business owner, it’s the same way. People are going to look at a three year average, typically a three year average of your earnings.

You might be tired. You might not want to do this anymore. That’s fine, you don’t have to maximize. But if you want to maximize, this is the time to really feel the energy. Get out there. Run it like you really meant it. But you know there’s an end to it.

You can probably pull out three years of energy. I’m a business owner, too. I get the tired thing, but this is the time to really put the pedal down.

Patti: What I’ve learned over 30 years is that when there’s a plan in place where you can see light at the end of the tunnel, all of a sudden energy shows up. I can do anything for three years.

Now here’s a question. It just popped into my mind. Let’s say that you’ve got this business owner and they’re really smart. They are 55 years old, and they say, “Well, I’m just going to take it easy for the next two years and book the sales in year three, four, and five so that I look good from a buyer’s perspective.” Does that ever come up?

Matt: It comes up all the time. It manifests itself. In due diligence, the buyer is going to want to know why that happened, why this sudden jump. We can’t play games. Everything comes out of the wash in due diligence.

Ultimately, if you’ve ever sold a business, you know what I’m talking about. You’re going to sign the purchase and sale agreement, which is going to include representations and warranties that you haven’t played games. Even if no one catches your games, you signed on the bottom line that you didn’t play games.

Now, we have a new owner in the business for a couple of months and your salesperson says, “God, I’m glad we don’t have that sales program anymore. The one where we couldn’t book any sales for two years and then the flood gates open.” It’s not a good idea.

Patti: What would happen in that case? Could the buyer come back to the seller and say, “There were misrepresentations, you played some games during the process?”

Matt: I guess it depends upon the level of extremity. If you just didn’t work the business very hard, that’s one thing. If somebody puts in place a program to falsify the earnings, you’ll be meeting your lawyers again.

Patti: There’s going to be a call back.

Matt: I love to shake hand with the lawyers at the closing table and look forward to the next deal. Not the continuation of this deal.

Patti: Here’s a question. How about partnerships and sole proprietorships? Are they easier or harder to sell than say a corporation? Is that something somebody should be thinking about? As they think about the next three to five years, should they incorporate? Does it look better from a buyer’s prospective?

Matt: No, I think buyers can deal with whatever the structure is. Most people are S corp, or LLCs, or pass through organizations. If you happen to be a C corp, there are special tax considerations you need to understand.

I can’t really give a lot of tax advice, but if you are a C corp and you want to sell, the next time you sit down with your tax advisor, you need to mention you were listening to a podcast. The guy said something about a stock sale, and an asset sale, and I own a C corp. There’s some tax issues with that.

Patti: Do you ever get involved in selling to employees? Does that come up? Do people want to basically sell to the employees? Do you get involved in those types of transactions?

Matt: A lot of people want to sell to their employees. That would be an employee stock ownership plan.

It’s tricky. Your business actually has to be suited for an employee stock ownership plan. It has to have maybe 20 or so employees. It has to have steady cash flow. Essentially, the employees are going to borrow money, and the employees themselves are going to be paying that back.

No, it’s not one, it’s not each one of them paying you back. It’s more of a trust situation. Most businesses I’ve run into do not qualify for an employee stock ownership plan. We’re more involved with selling to management. Oftentimes, we will facilitate the sale to management. Problem is management doesn’t have any money.

Patti: Right, and that’s pretty much the same thing. You want to make sure your financials are in tip top shape. Ultimately, you want to make sure the valuation is fair to both parties. Your point is a good point. A lot of times, management doesn’t have the money. They’re going out and borrowing it just like private equity.

Matt: I would guard against the idea of, if you have the idea that your management is going to buy you out, you need to think about how much money you’re paying them because they probably don’t have the money. In their ability to borrow it, you need to make sure their spouses are on board because if they’re going to borrow it, there’s going to be a lot of personal guarantees.

They have been your employee for 20 years because they’re not business owners. If you think they’re going to suddenly become a business owner when you retire, I’d check that. It usually doesn’t work out.

Patti: In a case with like what you do, I know the answer because I’ve seen you do this, this type of consulting and walking people through, business owners through the different options, that’s all part of this process, isn’t it?

Matt: Yeah, absolutely. We’ll meet somebody five years before you work for them. I’d love to get into dialog with someone whose maybe 5 to 10 years out because we can kick this kind of stuff around. Some of it becomes intuitive when they think about it, and then they can act on it.

Patti: Matt, I think it’s really also important for listeners to know that you’re the author of a book on this entire process. I wanted to give everybody a heads up. The name of Matt’s book is “Straight Talk from the Front Lines.” Matt, basically, has written from A to Z, this whole process, dos and don’ts, things to think about.

I will tell you, I’ve read it. I’ve given it to a lot of business owners. It’s the best book out there on this whole process. I would encourage all of you, if you’re interested, you could send Matt an email. Matt, why don’t you share what your email is?

Matt: OK. It’s mcoyne@bma1.com. If you send me an email, I’ll send you a complimentary copy.

Patti: When you do that, mention this podcast because that’s how you’re getting the complimentary copy.

Matt: I’ll be wondering where this email came from otherwise. Yeah, please do.

Patti: Absolutely. That’s great. Let’s pull this together. Three action items to summarize what we’ve talked about, so far. Number one, get started.

Matt: Get started, yeah.

Patti: Number two, get yourself financially prepared, professionally. Start doing those monthly financials so that, at any time, if somebody were to come around the corner and say, “I’m going to give you, seven times EBITDA.” You’re ready. You can have that conversation.

Matt: Yeah. It’s not expensive to do it. It’s more about process than paying for a new system. You can get QuickBooks for $300 bucks. You should have good financials.

Patti: That’s just an important way to run a business anyway.

Matt: It is.

Patti: It really helps you to make better decisions on your business. Number three, send Matt an email and get the book. That’s just, again, a terrific summary of what we’ve talked about so far, and what we’re about to talk about in the next podcast.

Folks, that’s it for today. Tune in for the next podcast. Matt and I are going to come back, and we’re going to get even deeper into the actual sales process. Some dos and major don’ts that will undermine the value of your business, and really hurt the people, that maybe you really don’t want to hurt. Tune into the next show.

Thank you so much for joining us. If you like this, feel free to go to our website, put your comments there. In the meantime, again, thank you so much for spending some of your day with all of us here. Have a great day. Take care.

Ep17: What Are Top Advisors Saying About the Market?

About This Episode

Ever wonder what the top advisors in the nation discuss in their meetings? Are the tariffs on China going to harm the average American consumer? Patti and her Chief Investment Officer, Brad Everett, return from Barron’s and Wall Street Journal’s Top Advisor conferences and share insights gleaned from these investment professionals. Listen to what is discussed at these exclusive events and what actionable steps they are suggesting.


Patti Brennan: Hi, folks! 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.

Today, we have Brad Everett, Chief Investment Officer of Key Financial. Brad is a regular on this show. He brings so much to the table and wait until you hear what he has been learning over the last month or so, so welcome.

Brad Everett: Thank you, Patti. Thanks for having me.

Patti: Let me give you a feel for what today’s show is going to be all about. Doing that, the course of it in a calendar year, I go, Brad goes, my team and I go to between 20 and 30 conferences on all different types of subjects.

This has been especially true. We’ve been to a lot of conferences in the last month or so. I thought it would be a really good idea Brad, for you and I to have a conversation about some of the things that you learned in the conferences that you went to and I’ll share with you as well.

We have this investment committee and we did this for the investment committee meeting last week. I thought our listeners would probably want to hear this stuff too.

Brad: Yeah absolutely. I think what our clients think about are the same things that we think about. It’s the same thing that other advisers think about and also portfolios…

Patti: Well, it’s really interesting because over the past few years what’s cool about this is that when I go to these conferences, we’ve got some visibility now. It’s one thing to listen to some of these people on CNBC or Fox. Unfortunately for them they’re just doing a 30 second soundbite. It’s quite another to be able to pull them aside and say, “Hey, I know what you said on TV but tell me what you really think.”

Then for them to be able to talk to a group of advisers for a full hour to do a deep dive on the subject, that they spent 30 seconds talking about. You got a much better understanding of what’s going on in the various markets or the topic that they’re discussing.

We’re not going to spend an hour today but we are going to spend 20 minutes or so talking about some of the highlights that we’ve gotten out of the past three or four conferences, that Brad and I have attended.

Brad, let’s start with you. I think that some of the things that you brought back to the investment committee really had to do with more economic information, rather than market, although as we all know the economy affects the markets and vice versa. What comes to mind in terms of some of the things that that you brought back?

Brad: Yeah. I think there are really four or five major themes that just kind of repeat and repeat. Obviously on a lot of people’s mind is trade talks with China, it’s a big one. We’ve got a new election cycle starting, that’ll be obviously become more and more of a conversation going forward.

Our economic health, is a recession looming or not? The Federal Reserve has maybe slowed down, but that’s always on top of people’s minds and the never ending, active versus passive debate is something that never seems to go away.

Patti: Yeah, it never goes away and never will go away. And I think that it’s important for us to discuss it for our listeners today, because they’re hearing it as well. So let’s go back to the trade war with China. I think that the massive drop that occurred a few Mondays ago was really scary for a lot of our listeners, and I think that there’s some misunderstanding as it relates to tariffs and the impact on Americans as well as the Chinese. Let’s talk about that.

Brad: Sure. I think you could you could easily make the argument that the odds of a deal getting done has been priced into the market. The world assumes that a deal will get done, so any kind of news that it would be stalled or maybe not ever accomplished at all is going to send the market down.

If they announce today that a deal was done and everything was solved, you probably wouldn’t see much of an effect on the upside. But if they said we’re not going to have this figured out for a year, the market may have a pretty big week of drops. I think the world is kind of assuming that it does get done. I think it’s probably in both countries’ interests to get it done, but to this point it hasn’t.

I think in a lot of ways it’s something that is a political issue and an economic issue. We have a much stronger negotiating position when we are announcing large numbers and great economic growth, but if that changes and earnings start to decline and recession gets closer, I don’t think that we have such a powerful ground to stand on and you might find resolution come sooner rather than later.

Patti: Which is exactly what China’s position is, because their economy has slowed down dramatically since the trade war has begun.

Brad: Sure.

Patti: I think it’s also interesting to bring up that on a relative basis, the size of the tariffs aren’t so large.

Brad: Right.

Patti: We hear our President talking about billions and billions of dollars and a 25 percent tariff does sound like a lot of money, but there are certain industries, there are certain areas of our economy that are affected more than others. I think that the areas and the people are really affected mostly are really in President Trump’s major voting base and we’ve got to be conscious of that.

I also think that we’ve got to understand what that really means for consumers. Terrorists really are not good for our economy, are they?

Brad: Yeah.

Patti: We hear about billions and billions of dollars coming into the federal government and of course we all hear about deficits and the federal debt and all of that. And so you hear billions and billions of dollars coming to the government. Here’s a newsflash, guys, that you should be aware of.

Though that money is not coming from China, it’s coming really from one of two ways. Number one, if I’m Tim Cook and I’ve got to make iPhone 20 and I’ve got to figure out where that’s going to be manufactured, he’s looking at a 25 percent tariff on manufacturing and assemblies and putting these iPhones together in China.

So he’s got one of two choices. He’s either going to assume that additional cost, which will translate into lower profits for Apple. Lower profits for Apple mean higher multiples, which means the stock is richly valued. So there is more risk in the stock and the stock market in general.

The other way that it could be paid for is by raising the cost of the iPhones. And it’s not going to be one or the other, it’s going to be a combination of the two. At the end of the day, it’s going to be coming out of our pockets one way or the other.

Brad: He’s a good example too, because I think Apple almost has the decision then to why not just build a factory in China, make the entire phone in China, and then just sell it to the people that live in China. It never has to be imported back into the United States. I think that some of the larger companies have that choice to make too.

Patti: Again, I think that’s why this trade war is so difficult because is China going to let them do that? How open is China to that? They’ve got their own phone manufacturer that we’re having issues with here in the United States and it’s creating even more tensions between the two nations.

Brad: I think in a lot of ways, it’s just the size of the tariff or this trade war, as you call it, is not very great. I think it’s just uncertainty and uncertainty always causes volatility.

Patti: And people love to talk about it.

Brad: Right.

Patti: People love to talk about it. Although, let’s talk a little bit about what China is doing in terms of, we hear this all the time, China is cheating. Isn’t it true – and maybe you can tell me if this is what you heard in your conferences – isn’t it true that that’s really the issue? That it’s really not the industry specific. It’s just that China is cheating.

Brad: Sure.

Patti: Let’s talk about what are they cheating about. What are they doing?

Brad: Yeah. I guess my understanding is it’s primarily intellectual capital. They don’t have the protections against stealing code snippets or stealing user interfaces or things like that. Anything that we’ve done here and it’s very difficult for a US company to prosecute over there. So it…

Patti: That’s a really good point. It’s interesting, because we have a senior executive from one of the pharmaceutical companies that literally got to the one yard line with China to bring a major deal over from the United States to China, and they decided not to at the very last minute, because they didn’t have any protection on their patents.

Another pharmaceutical company ended up going ahead then and doing a deal with China only to regret it. It was a disaster for that pharmaceutical company and they wished they had never done it.

That’s really what we’re talking about. Companies that do business in China don’t have the protections that we have here. They have access to the coding and the technology and you pretty much have to open up everything to the Chinese government.

The worry, of course, and what’s happened is they’ve stolen it and put that company out of business as it relates to the Chinese market.

Who knows what they’re going to do with that over the long run. That’s the issue that they have and that’s a very difficult problem to solve.

Brad: Yeah, that’s why I say, I think part of the problem is solving the problem. This is actually interesting, I never thought about it this way, but someone mentioned that this is really challenging without becoming overly political. It’s kind of an interesting political debate, has really challenged Republican orthodoxy. Right?

China’s cheating, but anything we do to retaliate is also cheating. If you really believe that the free market is the pure force that runs the economies of the world, then retaliating is just as bad as the original crime.

Patti: Yeah, because when you think about it, the tariffs are a form of manipulation or manipulating behavior.

Brad: Exactly. Right.

Patti: We accuse them of manipulating their currency, which they did for many, many years. They’ve eased up on that. Still, it all does fly in the face of this thing called free market economies, doesn’t it?

Brad: Yeah. It’s interesting.

Patti: It’s a philosophical debate, as well. Tell me what else, what’s the latest in terms of what’s going on with the election? That’s beginning to heat up, and I think even the Sunday shows are talking about that. What are you hearing? How important is that becoming?

Brad: It’s really important. I saw Conan O’Brien made a joke on Twitter a couple of weeks ago, joking that there is a Democratic candidate for every voter in the United States, as he sort it out, who ends up rising to the top. Right now, there are about 45 to 50 candidates. They’re all…


Patti: I was going to say it feels like the Republicans from four years ago because the Republicans had a ton of candidates, as well. They dilute their message by doing that.

It’s also interesting what we’re hearing about this whole talk about impeachment, and fascinating, what you heard as it relates to this discussion of impeachment.

Brad: Yes. That was one topic that they referenced. Even more interesting than impeachment is how they decide whether that’s a feasible strategy. I had not noticed this until I brought it up, but people in office, currently, are the only ones that bring impeachment up.

Throughout the course of many, many elections, that’s not as relevant as what candidates are talking about. That’s truly what’s interesting to the public because they’re the ones that are in town hall meetings answering questions from voters.

Candidates are not bringing up impeachment at all. That’s a sign that it’s probably not really on voter’s minds. They probably don’t care, one way or another.

Patti: It is interesting. A candidate who really wants to get a good run for the election, they recognize that that is a ladder that would be on the wrong wall. That they really want to talk about things that are important to the voters, which is really how’s that for a concept.

Brad: Which is interesting. I’ve never thought before about that kind of dynamic that the candidates are actually far closer to the polls than people that are in office.

You want to look at the differences between what the candidates are talking about compared to what people are already in office are talking about. Those mismatches are where the important differences lie.

Patti: Fascinating. The Federal Reserve, I know in my conferences, pretty much everybody is saying that the Fed is done, that they’re not going to continue to increase interest rates. How about at yours?

Brad: It’s astounding that for years and years, we’ve talked about how rates have to rise, and it’s ridiculous. They can do nothing but go up, and they stopped.

It seems like the market has priced in, even possibly dropping just a little closer to home. There’s two people in the office, right now, that are in the process of getting new homes. One of those people has been in a constant battle with his mortgage broker, about locking in a rate lock for the last 9 to 12 months as his house is being built.

Someone else bought a house about a year later, and has a rate where he originally locked in that expired several times. Rates are doing very little, nothing exciting. Possibly even dropped but they’ve been very flat, and likely will be for a while.

Patti: It is interesting. With one of those individuals, the rates actually were probably about half a point higher than they are today.

Brad: Amazing.

Patti: The mortgage rates have actually gone down, which is actually a good segue in the economy, in terms of what people are talking about in terms of the economy and do we have a looming recession?

The Federal Reserve stops increasing interest rates because they don’t want to force us, or they don’t want to push us into a recession. They’re “pausing right now.” What are you hearing in terms of that risk?

Brad: There’s always five to six major factors that usually tend to predict recessions pretty well. Just that the timing is almost impossible to figure out. There’s these things that usually have to happen first and very few of them have. They’re all within historical norms. Nothing stands out as being a real reason for concern.

There’s probably two areas that seem to be a little overheated or probably excessive compared to historical norms. One is mergers and acquisitions and IPOs. We’re seeing a flurry of IPOs again that seem to be overpriced. Very few of them can sustain their IPO price. There’s a lot of them.

Patti: There sure are. You look at Lyft and Uber. Both of those companies, great companies, wonderful product or service that they’re providing. The stock has gone down since the day they opened. That is a late cycle sign that something might be going on.

Brad: That seems a little frothy. The other one that’s starting to grow pretty quickly is corporate debt. When you see that, you have to look and say, “All right. Why?”

There’s good reasons for corporate debt and there’s bad reasons. It seems the recent increases in debt are not necessarily to increase productivity or expansion, but more for buying shares back and for paying dividends and things like that.

If you think of a company like AT&T, that borrows and pays a giant dividend, and they borrow again and pay a giant dividend. They’re not growing in any sense.

Patti: That’s not a good use of debt. That’s for sure.

Brad: Right.

Patti: It was interesting in the conferences that I went to. It was fascinating. I was up in New York City for “Barron’s” and “The Wall Street Journal.” They had a round table. The round table was 12 of the top advisers supposedly in the country.

It was fascinating to hear what my colleagues were doing and how similar it was to what we’re doing. One of the people, there’s a gentleman there from MFS. His name is Brad Rutan. He did a great job of framing what’s going on in the bond market right now.

For example, over 50 percent of the bond market right now, Brad, is BBB or above. BBB is just above the junk bond status. It’s just tippy top. It’s really the bottom rung of investment grade. Who’s doing these ratings? Of course, it’s Moody’s, Standard & Poor’s. Who’s paying for these ratings? Of course, the companies themselves.

They know that if they move them down a notch, that company is going to be in junk bond status, and they’re going to have significantly higher borrowing costs. 50 percent of the bond market is just above junk bond status. That’s a little scary.

The estimate was about $300 billion of that debt. If you think about the junk bond market being at one trillion. If you think that Moody’s did what a lot of people think they should do, which is downgrade those bonds, you’d be flooding that market with a ton of new supply. What happens then? The price goes down.

We have to be very cognizant that there is companies that are teetering there. As with everything, you’re going to learn that you know you got to look underneath the hood.

It’s funny. I was describing this in our investment committee meeting. It’s a long story, but my daughter and I were in the car. We were at a light. It was a red light.

She said, “Mom, I’ve got this light that’s going on and off. It’s a red on and off exclamation point on my dashboard.” I said, “Kelly, how long has it been going on?” She said, “It used to be yellow, but now it’s red.” We drove 300 feet. At the next red light, all of a sudden, we saw smoke billowing out from underneath the hood of the car, and the car was totaled. There was no recovering from that.

We have to be cognizant of the fact and wonder, “Gee, is there a red exclamation point that’s beaming on and off on our dashboard?” Most importantly, as with all of this, we’ve got to look under the hood, and see what’s going on.

The other thing that I found fascinating was as it relates to the municipal bond market. Here’s a little interesting fact for you. I know you know this, because you’re a chief investment officer, but 70 percent of the municipal bond market is not rated.

Again, understand how all these things work.

If a municipal bond wants to put out a new issue, they can go to Moody’s and say, “What do you think? Are we investment grade? We’d like you to rate us and, by the way, we will pay you thousands and thousands, maybe hundreds of thousands of dollars, to rate us.”

If they already know that they’re not going to get a good rating, what’s the chance that they’re going to pay all that money to get a below investment grade rating? 70 percent of the municipal bond market is not rated. Why is that relevant?

As you and I always talk about as we look at bonds, bonds represent debt. If I borrow money from you, you’d want to make sure that I’m going to pay you back. If I don’t pay you back, whether it be the interest payments or the principle, then that’s called a default. The default rates on municipal bonds are lower than they are on corporate bonds and other types of debt, right?

Brad: Sure.

Patti: Basically when you look at corporate bonds verses municipal bonds and you think about the ratings and you think about the default rates, well that’s fine and dandy, but we don’t get default rates on bonds that are not rated.

Brad: There is not included.

Patti: They’re not included, so you’re looking at default rates for only 30 percent of the market.

Brad: Right.

Patti: So we have to be really careful about municipal bonds. Don’t assume that these municipalities are going to be able to continue to pay. And in fact, many of them are having difficulty and will if and when we end up going into that recession.

Brad: Right. And you said, I thought you mentioned earlier that there was a very low number of them that actually had insurance on their bonds too, much lower than you’d expect.

Patti: Well yeah, it used to be. You know, 30 years ago when I first started, almost all municipal bonds had insurance, bond insurance. Now only five percent of the market has bond insurance. Now you don’t have anything, no net underneath you to continue making those payments and making sure that the bond doesn’t default. It’s a whole new market. It is not your grandmother’s municipal bond anymore.

I also thought it was interesting, Brad, in our round table. Again, these are the top advisers in the country and I would think that…And some of them are from the wirehouses, they’re in private wealth management, what have you, and they’re doing laddered bond portfolios etc. None of them are.

They are going to actively traded bond funds, not even ETFs. They’re going to active management because they want someone who is looking at the financials and deciding, do we buy this bond, do we continue to hold these other bonds, and making those decisions on a daily basis to make sure that the default rate on their portfolio remains very very low.

In terms of this active versus passive debate, what exactly were you learning when you were…?

Brad: I think there’s a few levels, a few ways to look at it. I guess the line, apparently I was the last person that ever heard this line because you knew it right away, but that somebody quoted, “The average money manager can’t beat the market, but also the average American can’t dunk a basketball either. But there’s a whole league full of people that can.”

In my mind, to be an active manager you would be rewarded for the skill of being able to piece together what’s happening in the real world now.

You’ve got this mosaic of data that comes in you can go out and talk to people in the streets and you can figure out what’s going on now and interpret a future significantly different than the way others would see it.

These kind of expectations are priced in. If you see it differently than everybody else and you’re correct, you win and you make more money of a higher rate of return.

That seems to me like a skill that you can learn, you can be taught, and you can get better at. I wouldn’t dismiss the idea that somebody actually could help perform on that basis.

Patti: OK, so how do you answer the argument that the average mutual fund manager, the average active manager doesn’t do any better than their index? In fact, most of them do much worse, even before their fees and certainly net of their fees. How do you answer that debate?

Brad: It’s an interesting use of data. I think if you have the average manager without fees, they probably are very close to the average. The average intelligence of all the people in the world is probably pretty close to average. That’s what average means. You add up all these guys and its average and then you take the fee off and of course they’re going to be on average below that.

But there is a group of people that have phenomenal research capabilities. It’s not just luck or skill of one person, it’s a commitment to research. These are things that there are large fund families that have that a lot of people don’t have.

There is a consistency though or sort of a, I’m drawing a blank on the word, not a resilience, but there is a repeatable list of people that are in the top group of investors. It’s possible that’s luck, but I wouldn’t expect to keep seeing the same group there over and over and over again.

Patti: I find it’s interesting because we talk about active share, that the ones that actually are in the top 10 percent or even the top 20 percent, actually their portfolios look very different than their index. They are really researching and finding opportunities that the index hasn’t included quite yet.

Brad: Yeah, I think benchmarks can be a little bit of a silly comparison because if you want to be the benchmark, you have to be different from it. The closer you are to a benchmark, the more likely you are to have the exact same rate of return. So at some point, you have to make some decisions to either not include something or to include something else. The more different you are, the more opportunity there is for you to either lose to that or beat it.

I heard a recent argument, again it was actually at the American West Conference, arguing for objective based benchmarks rather than just an index based.

It’s all well and good to compare something to the S&P, but looking back at the last 10 years doesn’t tell you if you met your goal or not. It’s kind of very delineated saying the last 10 years is the only thing that mattered. Today is the last day that matters, not the fact that I need to continue to hold this investment for another 20 years after today.

Patti: It’s such a good point. Point number one is, it’s time based. We can always pick a period of time, literally on a daily basis, where a particular fund looks better or worse than the index. So it’s really time based. It’s amazing how you can manipulate those numbers. Again, we look at the process, etc.

Also secondly, we really want to focus on outcomes, not performance. What is the outcome that you’re looking for because if you’re looking for the highest outcome, you’re going to also have to accept a lot of volatility and a lot of risk. By the way, risk is one of those intangible words. Risk in English means, the risk of you not being able to stay retired. That’s a big risk.

You’ve got to ask yourself, do you really want to have 98 percent of your money in the S&P 500 Fund? I’m not so sure if there is a risk that you could run out of money when you’re 78. Risk is a very real thing, it’s the outcome. What’s the outcome that you are trying to achieve and let’s make that real by making sure you’ve got a portfolio that is resilient in every economic environment.

Hey Brad, I don’t know about you, I don’t know what’s going to happen in the economy next week, next month, next year. We want to position and we want our listeners to be positioned so that they can weather anything that the world has to throw at us. That they’re going to be fine and they’re going to get the outcomes that they’re looking for.

So active versus passive, I don’t know about you, I’m not so sure that’s the right debate. I think the right debate is, are we hyper focused on this thing called the portfolio or should we be more focused on what is it in your life that gives you meaning? What do you need from a cash flow perspective? What’s your tax situation? And how can we manage the portfolio to help you accomplish all of the above?

What do you think Brad, is that a pretty good summary of the business model here?

Brad: I think you’re right on there.

Patti: All right, so that sounds great. Well, that is terrific. Folks, thank you so much for joining us today. Brad, as always thank you for your intellectual capital, you did a great job. And of course you’re always adding in your humor, you are one of a kind when it comes to those soundbites. That’s it for today’s show.

If you like what you’ve heard, please go ahead and head over to our website at keyfinancialinc.com. You can schedule a call with me and with Brad. You know what, while you’re at it hit subscribe, because if you liked today’s show, I’m hoping that you’re going to like not only today’s show, but all of the other shows that we’ve been doing. We’ve been getting amazing feedback from these shows.

The topics are very different, people aren’t hearing about some of these things and we try to give it to you real. That’s really what it’s all about is to give it to you real and give you actionable steps that you can take.

By the way, actionable for today’s show is look under the hood. Don’t believe everything that you read. Don’t necessarily listen to somebody’s soundbite on CNBC and think, “OK, I gotta do that.” There is not just an hour, there is days and weeks of additional information that you would need in order to apply whatever it is that you’re hearing in that 30 second clip.

If you want to learn more, give us a call, we’re happy to help. Again, I am Patti Brennan and I will see you in the next show.

Ep16: Having “The Conversation with Mom and Dad”

About This Episode

When is the “right” time to have the difficult conversation with Mom and Dad about driving, or moving, or any other important decision as they age? Patti asks the hard questions to an expert in the field, Estate Planning Attorney, Stacey McConnell, and the answers may not only surprise you, but may also help you navigate the complexities of aging parents and the decisions you need to make on their behalf.


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. By the way these podcasts are not just for you, they’re also for your advisors.

We’re going to be talking today about having that icky conversation with mom and dad. Joining me is Stacey McConnell. Stacy is the chair of the Estate Planning Department at Lamb McErlane.

What I appreciate so much about Stacy is her practical approach to this whole thing we call estate planning. It can be a really overwhelming topic for a lot of people. It’s not a lot of fun to talk about, and it’s even worse to have to bring it up with mom and dad.

Welcome to the show, Stacy.

Stacey McConnell: Thank you, Patti.

Patti: You and I have had this experience with our clients. It’s a really important conversation that our listeners should begin to think about having if they’re not aware of their family situation, mom and dad. There are a number of different angles that you can come from as it relates to these questions.

Stacey, the thing about what I appreciate so much about your approach to these things, you are not only the oldest of five children, you have five children of your own. You’ve seen over the years a lot of mistakes made, etc.

By the way, for those of you who are listening, we did a really, really wonderful podcast. It’s turning out to be one of the most popular podcasts that we’ve done that talks about the mistakes people make in doing wills and trusts. Stacey, tell us a little bit about your family and that practical approach.

Stacey: First of all, I’m not the oldest in my family. I have a twin brother who was born three minutes before me. We were born on the day that the time changes in the fall, October 30th.

He was born at 1:58 AM. Three minutes later, I was born. In between, the clock went back an hour. I was born at 1:01 AM, so I seem to be 57 minutes older, but I’m three minutes younger than he.

Patti: Oh, boy. How often did that come up when you guys were little?

Stacey: A lot. [laughs]

Patti: I’ll bet it did. That is terrific. Let’s talk about having this conversation with mom and dad. It can be an awkward conversation with many parents. You don’t want to come across as grabby, especially if you’ve got a young family, you’re just starting out and living on ramen noodles as Ed and I did.

Yet, it is important because you want to be in a position to be able to help your parents through the different transitions of life.

Stacey: Yes, and finding out in a crisis situation is the worst possible time.

When someone is suddenly sick and you don’t know how to pay their bills, where their documents are, who they want to do particular jobs like make health decisions for them. That’s not the time to find that out.

Patti: Very good point, especially since a lot of times, people don’t know where the will is or where the powers of attorney are. Again, it’s a crisis situation. It’s the last thing that you want to be thinking about.

Stacey: We get a call about once every couple of months from someone saying, “My father or mother died. I think they wrote a will. We’re calling every law firm in the county because nobody knows where it is.”

Patti: No kidding. Boy, that’s interesting. Again, folks, very important conversation to have with your loved ones. I think as we go into this, the real important thing, the key is tact and diplomacy, right?

Stacey: Correct.

Patti: It’s not information that you need to get all at once. It doesn’t have to be a fire hose. We’re going to sit down for three hours. Open up your books. Show me everything you have. Tell me what you’re worth.

The spirit of this is to get an understanding of what your parents have done to prepare for the different phases of their lives and the aging process. What would you recommend, Stacey? How do you approach that when you’re talking with different families?

Stacey: You and I spoke about it. What I think is a great approach is having the children talk about the planning that they are doing for their young family. Say, “We have children now. We need to name guardians, so we’re thinking about wills for ourselves and powers of attorney. How did you and mom handle this?”

Seek their advice. That could be an opening point to either find out they’ve done all the planning and it’s all done, or maybe we haven’t looked at it in 25 years.

Patti: Really good point. When you haven’t looked at it for 20 years, chances are what they did for your family when you were 10 years old is very different than what they would do when you’re 30 or 35. Yet, all too often, people don’t look at their wills or trusts and the provisions that they provided for.

It’s a good catalyst. A good trigger to remind them, “Oh, geez. Maybe, we should look at it, too.”

Stacey: Yes, and tax laws may have changed. That would be a detriment to the planning, often.

Patti: That’s a good point. Think about 20, 30 years ago. It was not uncommon when the most you could leave to your children was $600,000. That’s what it was when my dad died, $600,000. Tax planning was a big part of what we did for our parents and our clients.

Now, what’s the amount that you can leave to the next generation, Stacey?

Stacey: It’s over 11 million dollars. For a couple, it’s more than 22 million dollars.

Patti: The trust that they set up to save all these taxes may be completely unnecessary, and yet it may be locking up money that the surviving spouse could actually need.

Stacey: Many people that come in to see me today that haven’t been in in a while, we can do a much simpler plan for them. It’s very, very streamlined, particularly when one spouse dies versus what it used to be 20 years ago.

Patti: I was referred into a case where it was exactly that situation. They had not looked at their wills for 25 years and the wife died very suddenly. The husband was stuck with what they wrote 25 years before which was completely unnecessary and really tied up the money when there wasn’t any benefit to it.

That’s a good way of opening up the conversation. By the way, it might be a good way to talk about trusts. If you’ve got a young family and you’re thinking about trusts for your children, maybe the question could be, “Gee. How do they feel about trusts in general for children?”

“Are there special ages that they would recommend in terms of giving access to the principal to children? Do they have a particular philosophy on that?”

Stacey: Yes, that’s good. How do they want their trust assets? How would they recommend the trust assets be used for the children?

Patti: You can actually put in your document that the assets can be used if the child wants to purchase a home, for example, or start a business, or for advanced education. Those things are really important. When you think about it, a will is a letter. It’s a letter to the executor.

It says, “This is what I want to have happen.” Think of it from that perspective. Let’s set aside all the Latin, all the legalese. What do you want to write in your letter? That’s so important. It can be done. You could set up different types of incentive trusts that support your values and say, “It’s really important.”

For example, I had a client who believed that it was important that one of the parents stayed home with young children. They put a provision that if the couple decided to do that, that the trust would pay the equivalent of a $50,000 salary per year to the spouse that decided to stay home.

That was their values. There’s no right or wrong. It’s what they believed in. That was a wonderful way of communicating that to the family.

Trust can be wonderful things. It can protect your children from predators, divorce, lawsuits. It’s not just done. In fact, frankly, nowadays they’re not usually done for tax reasons and they can be, right?

Stacey: They can be. You have to think that it’s not always the trustee isn’t always a trust company. It could be another individual you know. It could be a family member. You don’t have to think in terms of a trust company when you have a trust.

Patti: That’s a good point. In fact, I find that a lot of times when there is a trusted friend, or a cousin, or someone like that, they can always hire the trust company. They can always hire professionals so they don’t have to know all the nuances.

Yet, you’ve got a human being that knows the dynamics of the family that can make decisions that you would be making if you were still alive.

Stacey: Yes. They know what’s going on directly with the family, whether it’s a drug issue or a divorce issue. That’s something a trust company wouldn’t know.

Patti: Exactly. They tend to be, in my experience, very strict. The trust companies are very concerned about being sued so they’re going to go by the letter of the law. To me, maybe it’s just me, Stacey. I just feel like a trustee, it’s a perfect word for that role. It’s the people that you trust.

It’s the people that would exercise good judgment.

Stacey: Mm-hmm

Patti: All the technical stuff, you can hire people, but it’s that judgment that is so important. You can set it up so that if they’re unable ir unwilling to serve, they can’t do it, they can choose their own successor.

Again, this is a person that you would trust that would exercise that good judgment even in that situation.

Stacey: That’s a very good idea to have them have a mechanism to get out of the job, at some point, if it’s a long term trust.

Patti: Excellent. What are some of the other things that you would recommend? Again, we’re talking about this icky conversation. Unfortunately, in this phase of life, people get sick. A lot of companies offer long term care insurance. Perhaps finding out whether or not mom and dad believe in long term care insurance.

If yes, great. By the way, which company? Are they increasing the premiums? What’s that been like? If not, getting a sense of their sources of income.

Stacey: Where those accounts are held so that if someone had to step in in a crisis, they’d literally know how to pay the bills. That’s important. Try to get a basic. You don’t need to know the numbers, but how to get access. If they have everything online, someone needs to know how to get into that account.

We’ve had that situation where someone died suddenly. We could not get into their email to find out where their assets were.

Patti: It’s a really messy, messy situation because if you don’t know, how are you going to pay all those bills? How are you going to provide for that care? The last thing that most parents want is a messy situation brought on by a healthcare crisis or an estate that was poorly planned.

This can often lead to tearing families apart, which is not what most parents want.

Stacey: It’s just because they didn’t plan. One example that we see a lot is a parent will put one of the children as a co owner of a bank account, when what they wanted to do was make them power of attorney on the account to help them pay their bills.

They did not want to give that account to that child, but because they’re the joint owner, they get that account. Then, the estate is imbalanced.

If they’re trying to be fair amongst the family members, it’s out of balance and there’s a great resentment in the other family members as to saying, “That wasn’t mom and dad’s intent.” Legally, that’s what happens with the joint account. It passes to the survivor.

Patti: You brought up online accounts. One of the things that we’re finding more and more often is people are going paperless. They’re not getting statements in the mail. Even if they are, banks aren’t necessarily sending out statements anymore.

I’m going to tell you one of those shoemaker kids stories. My mom had a bank account with a big bank, yet to be unnamed, and there wasn’t any activity in the account. When there’s no activity, they are not obligated to send statements. For three years, she never got a statement.

She passed away. I didn’t know that she had this account. About six months ago, I was on Pennsylvania’s unclaimed property site. I just typed in my own name. Saw that there was a couple of small things that were there.

Then, I typed in my mom’s name. There was a $9,000 account that had been sent to Pennsylvania because the bank didn’t want to be responsible for it anymore. Have you had an experience like that?

Stacey: We have. Every time we have an estate to administer, we look at the unclaimed property of every state where they lived during their lifetime. They might have lived in Maryland 20 years ago and forgotten they have an account there, moved to Pennsylvania. We look in every state.

The biggest situation we had was a woman who had developed dementia and moved to a nursing home. She had $800,000 at Vanguard that had been escheated to the state of Pennsylvania.

It was sitting in that unclaimed property account because they couldn’t reach her by mail, and that was the policy they had to follow. There was no way to know how to find her. It ended up there, but we collected it.

Patti: Wow.

Stacey: If you don’t know to go there, everybody should go some day and just look for themselves. You’ll be surprised.

Patti: You will be very surprised as I was. When you think about organizing financial affairs and pulling all of this together, again, you don’t have to get into lots of details but, at least, to let the family know where this stuff is and who your professional advisers are, so that, at least, the kids can go to those people to get that summary, etc.

Stacey: It’s so much simpler when they work with someone, Patti, the way you work with your clients, where you have all that information in one place. When we have a death, it is so much easier for the family and less stressful.

Not everybody has a Patti. If they don’t, and they have money in 10 different locations, somebody needs to be able to find that.

Patti: Thank you, Stacey. It is really interesting. Most advisers today, hopefully, are at least asking those questions. We take it to another level. I just feel like it’s my responsibility to do that. That’s my job. I’m the financial planner. We organize everyone’s financial affairs.

We also need to get an understanding. What do we do if someone needs care? Do they have the long term care insurance? Things of that nature. If so, what is it about? If they don’t have it, how are we going to pay those bills? To me, that’s just part of the job.

I often tell people, a lot of advisers just manage the portfolio. It’s all about the pie chart. Folks, those of you who are listening today, I don’t know how to tell you this, but you’re just not a pie chart. You are a living, breathing human being. You’ve got parents. You’ve got kids. You’ve got things that you worry about.

To be able to have that conversation, have it organized, and to run the different numbers and to have Plan B already can bring so much peace of mind to you and your entire family. Going through this, some of the other questions that you go through, you think about what your preferences are. What your wishes are.

I often think about, “Gee. When that happens – I know when my dad died, when my mom died – we knew that they wanted to be buried and cremated, to have that conversation. Is that something that you guys typically do when you are meeting with a family?

Stacey: Yes, we have a worksheet we have clients complete. That’s one of the questions on there. We point out that we don’t think that’s a great thing to put in the will. It’s something to communicate ahead of time to the family what you want. Particularly, when it’s a blended family, it could be very difficult.

We had a fight in court about fighting over the ashes between the second spouse and the first children. That was just a terrible thing at a terrible time.

Patti: Wow, that’s amazing. I am reminded of a pretty crazy story. Again, in my own situation, the shoemakers kids stories. My mom had moved to Florida, and she had made it clear that she wanted to be cremated and buried up here in Pennsylvania next to my dad.

When she died, I flew down. I was the executor, etc. We made those arrangements. We had her cremated. As I was talking with the funeral home, they said that they would take care of mom and then FedEx her cremains to my home up in Westchester.

It sounds great. Everything was done. We were planning a memorial two months later. Then, the weeks went by. I was traveling. Talked to my son. Michael said, “Oh, Mom. You got a FedEx package.” Of course, I thought immediately, “Oh, that’s mom.”

I was gone for about a week, came home, went to my son and said, “Michael. Where did you put that FedEx box?” He said, “I put it right on the hall table.” I said, “It’s not there. Where did you put the FedEx box?” He said, “I put it on the table. It was right there on the hall table.” I said, “Michael, that’s my mom. Where’d you put mom?” He said, “I didn’t put her anywhere.”

Stacey, I swear to God, I lost 10 years of my life for the next two weeks. We turned my house upside down, every closet, every drawer, looking for mom. I couldn’t bear the thought of having to go back to my six brothers and sisters and say, “I don’t know how to tell you guys this, but mom’s missing.”

They would kill me. I felt like I was seven years old all over again. Of course, mom is up in heaven looking down on me making me feel like five. It was a difficult, difficult time, a weird situation. About two weeks after that, I was at the house. Sure enough, the doorbell rang. There was mom.

For whatever it’s worth, really important to have that conversation. Do you want to be cremated? Do you want to be buried? By the way, where? Who are you going to give that responsibility to? That was one of those situations where it was when you’re doing the wash and the socks get lost, except this time it was my mom.

Stacey: [laughs]

Patti: Just to pull this together. We’re going back to having that conversation, that icky conversation with mom and dad. The best approach that you found and that I found is to approach it very softly. Again, it doesn’t have to be all at once. The takeaways here are easing into the conversation.

Stacey, probably asking for advice vs. mom and dad. What did you do? You need to tell me right away.

Stacey: Yes, that might be an easy way to get them to open up.

Patti: Because most parents don’t want that messy situation tearing their family apart. It’s a tough topic to bring up. It’s probably better to have a list of questions already prepared.

Finally, for those of you who are the parent, please do your family a favor, and don’t wait for them to bring up the topic.

Have your financial affairs already organized. Maybe, bring it up to the kids yourselves and just very generally gloss over. Talk about some of the things that you’ve done to prepare for, whether it be a healthcare issue or the death of one or both of you.

Stacey: That’s right. I think everybody think there’s another day when they can do that, but there isn’t always another day to do that, and always think there’s more time in the future.

Patti: One of the things that I have found is that as you do that again, you could do it voice to voice, person to person, or you could even put it in writing somewhere. It’s a wonderful opportunity to communicate your values and what your hopes and dreams that you have for your children.

Imagine being your kids. What a gift that would be for them to read something like that, especially if it’s in your own handwriting.

Stacey: It’s very compelling in that fashion. Particularly, if you have certain keepsakes around the house that you worry will be touchpoints for emotional division in the family. To have that in writing as to who’s to get your diamond ring. Who’s going to get dad’s tools? Whatever you think is going to be important.

It’s good to put that your own writing and store that in a safe place with your other estate planning documents. You can always change it in the future, but at least, put something down.

Patti: Exactly. That’s another good point. It’s a flexible approach to these things. Stacey McConnell, thank you so much for joining us on our podcast today. Folks, that’s pretty much it about as it relates to having that icky conversation with mom and dad.

If you are mom and dad, just go ahead and start that ball rolling and have the conversation. Make sure your financial affairs are already organized and in a place that’s easy to find. If you want to get a hold of Stacey, we’ll have her contact information in the show notes.

If you like this episode, please feel free to share it with others. Share it with other advisers, your personal advisers. That’s what we’re all about. Relay this information so that you can have those conversations with the people that you’re working with and the people that you love.

This is Patti Brennan. Thank you so much for joining us on the Patti Brennan podcast. We will see you in a couple of weeks.

Ep15: MIT AgeLab – Inventing Tomorrow

About This Episode

The last episode of the 3-part series, Patti circles back with John Diehl of the Hartford Funds. They delve into the latest research that the MIT AgeLab is conducting regarding the advancement of technologies to improve the quality of life as we age. They discuss the 5 specific ways technology will change the way we age, and how they are connected to the three major issues that will inevitably affect us all.


Patti Brennan: Hi, folks. 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 have tuned in that last podcast, the feedback we’ve gotten has been phenomenal. With me again is, John Diehl. He is senior vice president at Hartford. John works directly with the MIT AgeLab. I have to tell you that the last show was so fascinating. We are going to pick up where we left off, and talk about the different phases of a person’s life.

We talked about the concept of 8,000 days. So, John, can you re cap for us what we ended with on the last podcast? Tell us about the 8,000 Days.

John Diehl: Sure, Patti, and thanks for inviting me back. 8,000 days is, basically, the theory from Dr. Joe Coughlin, who heads the MIT AgeLab.

Joe puts it this way. He says, “In America today, your life can be divided into four 8,000 day segments. It’s approximately 8,000 days from birth to graduation from college or university. Another 8,000 days to your first midlife crisis,” because we may have multiples now.

“Another 8,000 days till the day we retire and, oftentimes, another 8,000 days, at least, until the day you expire.”

8,000 days, if you broke out your calculator, it’s just a little shy of 22 years, so you’re looking at, approximately, ages 22, 44, 66, and 88.

Patti, the challenge is…And you started off the last episode with a quote from Dr. Coughlin, who said, “We have a longevity paradox. We finally have achieved what mankind has been trying to achieve since we walked living longer.”

Now, the question is, what do we do with all that time? That’s exactly what 8,000 days is about. If you think about those segments, first of all, Patti, when people realize that they may be retired for as long as they were alive between birth and graduation from college, wow.

Patti: All of a sudden, it becomes very real. Wow, what am I going to do with all that time?

John: Not only…

Patti: I went through so much during that first 22 years.

John: Yeah, not only are we living longer, we’re living better, but here’s the challenge. That, in the first three segments, the script has already been written. By that I mean, we know in the first segment go to school, get good grades, get into the college, the career, the armed services of your fancy.

When the second segment starts, everything is growing. Hopefully, your income’s growing, responsibility’s growing, your family may be growing, all until we get to the point, usually in your mid 40s to early 50s, when we pause, we step back, and say, “Wait a minute. Is this what I want for the rest of my life?”

We’ll kick that around for another 22 years, but it’s that last segment, Patti, that we don’t know how to conceptualize it because people living retirement today often base their vision of retirement on what they observed in their parents and their grandparents’ generation. The problem is our retirement today looks an awful lot different from that.

Patti: It is a whole different ballgame. I think that that’s one of the biggest issues that we find in the financial services industry.

As you know, I used to be a nurse. I was an intensive care nurse and dealing with the aspects of losing the comfort of a regular income and the concept of perhaps a declining health or cognitive health. Those two things coming together, and then having the ambiguity of, “What am I going to do with my time every day?”

It does create some anxiety that people often don’t realize until they’re in it, and then it becomes a whole new ballgame for them. It’s so very different than what they saw with their parents.

John: That’s interesting, Patti, because Dr. Coughlin has a study that he refers to where it states what concerns people most about retirement as we age. I’ll tell you, through age 65, I think, traditionally, the financial services industry has done a pretty good job because as most people guess, money is the thing that concerns most about retirement.

How much is it going to cost? How much income am I going to have? How much do I need to make it last? How much can I take each year? It’s all about the quantitative, but we see from age 65 to 75, money begins to be replaced by health care as our number one concern, or our physical health, I should say.

Here it would be a good thing to point out. The researchers at MIT say that aging should not be defined by chronological age. It’s really a factor of three primary resources we have available to us. What is your physical resource? How’s your health? Do you have the health to be able to enjoy the things you wish to?

What are your finances? Do you have the money to enable you to do the things that you want to do? Thirdly, the one that’s neglected the most, your social resources. How engaged and connected are you? There’s three resources.

I can tell you, Patti, I’ve met some folks who were 85 years old who are still in the honeymoon phase. I’ve met other folks who were 64, and unfortunately, entering some of their managing longevity stages that we’ll talk about later on this podcast.

Patti: It is very true. It is unique for each individual. It’s not something that, “Oh gee, I’m 65 years old and this is where I am.” It’s a case by case situation. I think that that is so important and relevant.

John: Interestingly, too. I mentioned that study. At age 75, money actually shifts down to the third point. Health is number one, cognitive decline number two, money number three, because as we age, we start to set in with, “What good is the money if I can’t enjoy it the way I intended?”

Patti: What my experience has been is it becomes less relevant, and yet, they do worry about their own cognitive decline and their ability to manage it properly.

I find that a lot of times people will come in, couples will come in, and even if the couple, one person is relatively healthy, the other one is no…They want to make sure that if the not so healthy person has always been managing things, that they have a go to person to help them, and make sure that everything continues as seamlessly as possible.

Once they have that comfort and that peace of mind, then they can go on and live their life, and deal with some of the other challenges that they might have.

Let’s go back to the other 8,000 days. The MIT AgeLab, which by the way, again, if you listened to the first segment, or if you didn’t, go back and listen to it.

It’s amazing, some of the things that John has brought to our attention in terms of what the AgeLab has discovered as issues that you may not realize until you listen and understand, in terms of the decisions that people make, and how retailers, and how financial services and health care needs to change to accommodate the things that are happening as people age.

Let’s go back. The one study that the MIT AgeLab did is phenomenal. It’s the age you peak at everything. For example, brain processing power, I never would have thought that with four kids, that they peaked at age 18.

John: [laughs]

Patti: To me, they had no common sense.

John: I always joke with people remembering names. Sometimes we worry ourselves. We say, “Gosh, I can’t remember names anymore.” Guess what? If you’re over age 22, that’s perfectly normal, but you say, “I’m really concerned. I can’t even remember faces anymore.” That’s age 32. [laughs]

Patti: Wow. OK, I don’t feel so bad now, John. Thank you so much. That’s amazing. When salaries peak…Life satisfaction, let’s talk about that.

John: Yeah. The interesting thing about life satisfaction in this study is it’s the only data point that repeated twice during the lifespan. The first time life satisfaction peaks is age 23. Most of us are probably getting started on that exciting phase of our life.

The world’s our oyster, all the avenues are open, not a lot of obligations, just getting started. It’s exciting, but the interesting thing about that time is we seem to have a lot of time, but we don’t have the money to do anything with it. [laughs] We make the most out of it that we can.

Interesting, life satisfaction peaks again at age 69, so age 23 and age 69. If you ask, “Age 69? Why?” It’s when the researchers would say that you’re probably at your highest average of those three things that I talked about.

You probably still have a good amount of your physical health. You have built some financial assets, and now in addition to having some time, you have the money that you can put towards that time. Thirdly, you’re still pretty healthy in terms of your social engagement, your friendship circles. You may still be working, or volunteering, or whatever it may be.

When I say this, people think, “Wait a minute, I thought you said as we get older or we get these health issues that…” Yeah, you may, but what’s even more interesting…Two more data points for you, Patti. My favorite, happiness with your body peaks at age 74.

Patti: I love that one. I thought that was phenomenal.

John: I’ve told myself at that point, you got to play with the hand you’re dealt.

Patti: Absolutely.

John: It finally hits home. Lastly, psychological well being, “Tomorrow is going to be better than today,” peaks at age 82.

Patti: To me, that seems counter intuitive. Why is that, John?

John: It is because you recognize the things in life that are really important as you begin to take mortality into account. You allocate your time towards the things, hopefully, that mean more than some of the other stuff that we worried about at other points in our life. We have the time and the assets and the resources to devote ourselves to things that mean something.

Patti: You know what word comes to my mind, John?

John: What’s that?

Patti: Wisdom.

John: Absolutely.

Patti: That is, to me, everything. When you’ve lived your life and you’ve seen so much, you’ve probably gone through a lot of things, it could be with family, etc. You get to the point of time and you understand that, “You know what, at the end of the day, does it really matter? What really matters?” To me, that’s what wisdom’s all about.

John: For sure. It’s pattern recognition more than particulars, getting to recognize situations and understanding. What you’ll hear from people who are more seasoned, typically, is rather than running around with their hair on fire. They’ll say, “If it’s the worst thing I ever face, the head will be a blessing.” We’ll cross that bridge when we come to it.

Patti: What a wonderful thing to be able to say.

John: Absolutely.

Patti: Let’s talk about the four phases of retirement. Again, perfectly defined. I see it every day. I’ve never seen anybody define it as well as you have, as well as Dr. Coughlin at the AgeLab. Let’s talk about the four phases.

John: Sure. Let’s start with the first phase, which we call either managing ambiguity, or it’s also known as the honeymoon phase. The first phase of retirement is the thing where everybody usually thinks of. “I can’t wait. I’m gonna take more trips. I’m gonna go see the grand kids.” The key is flexibility. Thinking about how we’re going to spend our time.

Here’s the thing, Patti, is that one of the major issues that we’ve seen people wrestling with now, in that initial phase, is the role of work. I know what you’re saying. You’re thinking, “Retirement used to be defined by absence of work.” Not anymore.

What I’m going to tell you is what we see is that 34 percent of American state, they’re actually 65 percent say, “I’ll work past age 65.” 34 percent say, “It’s not about the money. It’s about the social engagement. It’s the identity. It’s the purpose. It’s the mission.”

Patti: I see it every single day and it is so important. We forget the importance of that interaction with people at work and how it helps to define our purpose. It gets us up in the day, etc.

John: A point here from a gender perspective, and this is generally speaking. This area of work and loneliness and isolation is hitting the male population more so than the female population.

Patti: I have had several clients who were high powered executives, Fortune 500, and we planned the retirement. We got them retired. They have all this extra time, and they went into a deep depression. I’ve had several people in my conference room and they burst into tears. They said, “I just don’t know what to do with myself.”

John: Because they’re supposed to like it but they don’t. In fact, for a gentleman, the second question he’s most likely to hear from someone he’s never met before after he’s asked his name is?

Patti: What do you do?

John: What do you do? Not just for 5 to 7 years anymore, 15, 20, 25 years. Patti, I’m not telling you, you’re going to work like you worked for the first 30 years of your career. You’re going to want more flexible work. You’re going to want more control over your schedule.

You may only want to work 15 hours a week not 60, or you may want to work for a cause that you believe in aka volunteering.

Somehow, in this ‘60s to ‘70s time frame, when I’ve got all those resources I’ve talked about, “I’ve got tremendous skills. I’ve got people skills. I’ve got institutional knowledge. I’ve got work ethic. I’m not ready just to retire to the rocking chair.”

Patti: I will tell you, to me, one of the biggest mistakes that large companies are making is forcing these people to retire. Think about the experience and the resources that they represent over their lifetime and you’re going to just push them out the door. I think it’s crazy.

John: Especially now when you look at US workforce demographics. We’re running up against the labor shortage especially in skilled marketplaces. You’re going to find companies wanting to retain their aging employees.

Also, let’s not forget those employees are usually the culture carriers of your company. They teach the younger folks who were coming on board the importance of why the company does what it does, not just how they do it.

Patti: Great, great point. The other part of it is the change in the family dynamics in that first phase.

John: Sure. In the honeymoon phase, when it starts, you’ll probably find yourself providing more financial support to your aging children than you will your aging parents, but at some point in this honeymoon phase, it will transition. You’ll turn around and notice that mom and dad need a little bit more help.

Remember that help may not just come in the form of making sure that they’re taking the proper med. It’s a tree falls in their yard who make sure that’s cleared out of there. Who’s checking in on them to make sure that they’re safe in the home? Oftentimes, this is a loss of productivity.

As we think about what our retirement plans are, I think Patti, I’m sure you do this with your clients, is thinking about the role they play in their own family. Will they be a primary caregiver, the spouse, another family member, mother, or father? It’s important to take in consideration.

Patti: Again, because people are living longer. We talk about the sandwich generation as it relates to people in their 50s. People who are retired are still in that sandwich generation where they’re taking care of, in some cases, their own parents, their children, and even grandchildren.

Think about the implications, both financial as well as personal, what that could mean for that retirement experience.

John: The last thing that happens during this phase, as I say, it’s where the rubber meets the road. For years, we’ve worked with you, Patti, that help us understand how much income will be coming in? What were our expenses look like? The truth is, it’s pretty hypothetical. It’s not hypothetical anymore.

Patti: It’s very real and that becomes real scary.

John: [laughs] It becomes real. We don’t have to guess at it anymore, but it may take us a few years to figure out what in reality it is. That all takes place during this first phase, if you will, the honeymoon phase.

Patti: The next phase is the big decision phase. Boy, we see it all the time. Again, it’s so important that we recognize that’s a phase. We need to make these decisions.

John: In the big decision phase, it’s usually when somebody says, “It is time to cut back in what I was doing for work or volunteering.” We have to make some decisions. On the first podcast, Patti, we’ve talked about the three questions, the ice cream cone and the light bulb, and who am I going to have lunch with?

In this phase, those are the three questions that could become really important. Where are we going to live? Are we going to move closer to family? Are we going to move to a place where we always wanted to live? Is there access to the things that we want to do?

Yes, medical care, but also entertainment and dining options. You name it, anything is physical activity. We have to remember that. I think this is partly where ageism has seeped into all of our lives.

People who are in their 70s, 80s, and 90s are still real people that have activities and ambitions, and things that they want to do. We can’t let our environments limit us.

Patti: It’s really important to ask the question because oftentimes people will come in and say, “We’re thinking about moving close to the kids.” They live in Virginia or they live in California.

I always reflect that back to them and say, “It really would be nice to be close to the kids. What’s it going to feel like when you move there and you’re not near your friends? How’s that going to feel? You’re going to have to have new doctors. How does that feel to you? Does it intimidate you? Is that going to be OK?”

Some people are very comfortable with that. They’re very gregarious. They make friends easily. There are others who, they’re home buddies. They watch television. They don’t necessarily have or need a big social network.

That’s a whole different ballgame, but people don’t often think about that. They’re going to move close to the kids, but what else does that mean in terms of their quality of life?

John: What happens when the kids get transferred, move out of town to the next location? Your point, it’s not easy to make new old friends. In fact, it’s virtually impossible.

I ask people to think about the communities within their community that they’re attached to, if it’s a faith community, if it’s a community organization, if it’s friends, well then maybe there’s a way they can try out that new area before they make the drop decision on, “Well, let’s move there.”

Maybe they can long term rent there for a season where they are near their family, but they can start to investigate. Where are the doctors? Where are the grocery stores? Where are the entertainment venues? Where can we start making some friends before we even move into that community?

Patti: John, I can’t even tell you how many times I have that conversation and encourage people not to go ahead and make a permanent decision on something that could turn out to be temporary. It is perfectly fine to rent.

In some cases, it’s much more cost effective because you also don’t have the things that come along with homeownership including the transaction costs and things of that nature. That’s really interesting. Anything else in the big decision phase?

John: No, I think again, revisiting that your first podcast episode where we talked about those three questions, housing, transportation, social connection, biggest things in that phase.

Patti: Now we’re in phase three, navigating longevity.

John: In navigating longevity, it’s usually signposted by the fact that someone needs a good amount of caregiving. Could be a spouse who’s providing that caregiving could be an adult child who’s providing that caregiving. Depending on where we are in that. Caregiving, as I mentioned earlier, is more than just making sure mom and dad are taking the right medications or eating right.

It’s everything associated with it. During this time, if you’re working and you’re providing caregiving, you’re going to find your productivity challenged because when mom or dad need help, it’s not always exactly scheduled.

Patti: I will tell you John my own personal experience. I remember when my mom moved close to my home because the home that we all grew up in was too big for her to handle. Dad had passed away, so she moved close to my home, and she was literally between my office and my home. It was really interesting. It’s really hard to take care of another human being.

There were a couple of instances where I was in the conference room, and we had this code, and I got the code, I got the alert, and my mom was stuck. I needed to leave that meeting right then in there, get in my car, blast over to get my mom to rescue her from whatever it was that she was going through.

That happened a fair amount of time, and it made me realize how hard it is to really do this on an ongoing basis. It was also a very difficult thing for me to admit that maybe I wasn’t the right person for her to be close to.

That my life had taken on. I have four kids. I have a business. We had to make a different housing decision for my mom. She moved down to Florida to be closer to my brother because he was able to be a little bit more flexible. I got to tell you, I felt terrible about that. I felt so guilty because I’m the girl. I’m the nurse of the family. I’m the financial person of the family. It’s an interesting thing to wear both of those hats. Yet I wasn’t able to do for my mom what she really needed.

John: Well, and even for the person that does, Patti, I’m sure that you’ve tried to help people through connecting them with resources that can help. In my own situation, my grandmother lived with my mom for years. It wasn’t just the physical aspect of caring for my grandmother. My grandmother aged and she started to lose it a little bit on the fringes of her mind and memory. She would accuse my mom, perhaps, of stealing things. There was the mental part of it.

At the same time, this is a parent child relationship. We always tend to look at our parents as though they were age 30 and we were age 15. We have that respect, that love for them. Yet it changes. It takes a certain mental toughness to be able to stick this out.

I will say, Patti, I think one of the most underappreciated aspects of working with competent financial advisers is getting to learn about the experiences of other people, like me.

Patti, I know you’ve helped a lot of people. I know you, yourself, have dealt with some of these issues. Being able to share those things. “Hey, if I could do it all over again, here’s something I wouldn’t change” or “Here’s a couple of things that I would change immediately, that I would do differently.” That kind of insight to someone that’s in that kind of position is worth more than gold. Again, that comes from either the person needing care or the person providing the care.

Patti: It’s interesting. I often tell people that when I take a look at over the 30 plus years that I’ve worked in this industry, we have literally helped thousands of people retire and stay retired with peace of mind and financial security.

You get to do it once. Don’t you want to work with somebody who has pretty much seen almost everything and not have to experiment and make the mistakes that so many other people have already made? That, to me, is the most important thing.

This is not about Patti Brennan. This is about the industry in general. Again, kudos to the MIT AgeLab that’s bringing in all these insights to make us better at doing what we do for our clients. Kudos to Hartford for partnering with them and bringing this to financial advisers throughout America. It’s important. It makes a huge difference in the quality of life for our clients.

To me, that’s what it’s all about. I tell people all the time, “This is not about your money, it’s about you.” That experience and making sure that they get to live life on their own terms is my purpose to why I do what I do.

John: Absolutely.

Patti: We’ve gone through the first three phases. Fourth phase which is…Boy, wow, what a phase this is.

John: The fourth phase is called the solo journey phase. Obviously, it’s nothing that any of us look forward to, but the researchers at the AgeLab do remind us. Aging is usually not a team sport.

It’s usually a high likelihood that one of the two in a committed relationship wind up aging by themselves, divorce, widowhood, never married in the first place. Now that we’re living into our 90s, it’s something that we need to think about and prepare for because we can stick our head in the sand.

Pretend it isn’t going to happen, but that only makes it more difficult to deal with that and when it does. In this stage, Patti, the survivors really called to reinvent themselves.

It’s interesting because depending on what stage of life it happens, what their physical, financial, and social resources are, they may be thrown into back and to one of the other phases. You may be asking questions, “Where do I want to live? Am I going to go back to work?” All those things, but social interaction is so important at that phase.

Patti: It is so very, very important. To me, the most important thing is to recognize that that’s a possibility and to really, really know the questions to ask. Nothing has to be decided upon right away. You’re dealing with the grief. You’re dealing with the loss. I have a wonderful, wonderful client.

She’s just the greatest and she was a sudden widow. I thought it was so interesting. I was checking in with her. I gave her call. Just wanted to see how she was doing, and she said, “You know Patti, the one thing that I never realized about John is how loud he was.” I’m like, “Really?”

She said, “Yeah, the house is just so quiet. When he was here, he’d be upstairs. I could hear him walking. I could hear him pulling the chair out in the office. He was clanking. The TV was on. He’s opening the refrigerator, and now it’s just so quiet.” I said to her, “What are you going to do to create sound in your life?”

She thought that was such an interesting question, and I said, “It’s not so much about the sound. It’s about the people that you’re surrounding yourself with. I just want to make sure that as difficult as it is, to make sure that you’re going out, that you’re not isolating. It’s hard to go through this grieving process. There’s no perfect way. It’s different for everybody.”

I said to her, “I just want you to know I’m available any time you come over the office. You need something to do. Believe me, I’m going to put you to work. I’m going to have you photocopy whatever it is, but just occupy yourself to get you through this difficult period of time.”

John: I think the number, Patti, is something like 40 percent of women over age 70 are currently aging by themselves. As we think about divorce, widowhood, never married in the first place. This is where it comes in to the study of longevity because we’re living into our 90s.

The average age of widowhood in the United States, I believe, is right around 59 years old. People hear that and say, “My god, it’s so low.” What happens is, men tend to marry younger, especially subsequent marriages. They tend to marry quite a bit younger, mixed mortality in there. You have this and it never fails, Patti.

I’ll be speaking at a public event. There will be two ladies sitting up front.

They’ll come up to me afterwards, and say, “John, I can’t believe you just said that. I’m 53, she’s 56. We were both widowed in the last year. Let me tell you what we’ve been going through.

“The reinvention of self, obviously, as you said, the grieving period has to happen, but realizing that there is still life out there for you, and realizing often that your spouse would want you to take advantage of that is sometimes the impetus that get back in the game because that game could last another 20, 30 years.”

Patti: John, I am all about the hope. I’m all about the perspective of, “This is a terrible time you feel awful and it’s the pits.” We’ve gone through this with so many people, and you’re probably not going to believe it when I say it, but it is going to get better.

Your life is not going to go back to ever what it used to be, but it’s going to go back into a new normal for you. What we’re going to do together is to figure out what that looks like for you.

John: Patti, I would come back to recap what we talked about at the beginning of this episode. Psychological well being, “Tomorrow will be better than today,” continues to improve, generally speaking, through your early 80s, which means that this improvement may actually encompass things like widow or widower hood. It may encompass your own physical issues.

Again, being able to recognize patterns and being able to look for the hope, as you mentioned, in the life that lays ahead and the opportunity, is a reason for optimism.

Patti: John, thank you so much. This is fascinating. We’re going to stop here because I want our listeners to know that in the next podcast we are going to be really digging into the practical things that people can do because you know me. I’m very action oriented.

We’re all about helping our listeners, helping our clients, helping other financial advisers provide a client experience that makes a difference in the quality of their lives.

In the next episode, we’re going to be talking about the practical things that we can do, thanks to the MIT AgeLab, Hartford, and John Diehl, that we can learn and apply on a day to day basis to really make a difference for our listeners and the people that they love the most. That wraps it up for today. Thank you so much for spending your time with us.

If you want to learn more about the insights that we’ve gained from the MIT AgeLab, just head over to our website at keyfinancialinc.com. You can schedule a call with me. By the way, be sure you hit the subscribe button if you liked today’s episode. Turn on your notifications. Share it with as many people as you want. This information is really, really important. That’s why we do it.

Let us know if there’s anything else that you want to learn about. Until next time, I am Patti Brennan, and we will see you in the next episode. Thank you so much.

Ep14: Life Divided Into 8000 Day Segments – Where Are You Now?

About This Episode

In this second episode of the 3-part series, Patti is once again joined by John Diehl of the Hartford Funds to discuss MIT AgeLabs’ study that divides life into 4 segments of 8000 days each. Each segment is significant in the study of longevity. At what age do we peak intellectually? When do we peak at life satisfaction? Research shows that there are 3 questions that will predict your future quality of life… what do your answers predict?


Patti Brennan: Hi, folks. 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 have tuned in that last podcast, the feedback we’ve gotten has been phenomenal. With me again is, John Diehl. He is senior vice president at Hartford. John works directly with the MIT AgeLab. I have to tell you that the last show was so fascinating. We are going to pick up where we left off, and talk about the different phases of a person’s life.

We talked about the concept of 8,000 days. So, John, can you re cap for us what we ended with on the last podcast? Tell us about the 8,000 Days.
John Diehl: Sure, Patti, and thanks for inviting me back. 8,000 days is, basically, the theory from Dr. Joe Coughlin, who heads the MIT AgeLab.

Joe puts it this way. He says, “In America today, your life can be divided into four 8,000 day segments. It’s approximately 8,000 days from birth to graduation from college or university. Another 8,000 days to your first midlife crisis,” because we may have multiples now.

“Another 8,000 days till the day we retire and, oftentimes, another 8,000 days, at least, until the day you expire.”

8,000 days, if you broke out your calculator, it’s just a little shy of 22 years, so you’re looking at, approximately, ages 22, 44, 66, and 88.

Patti, the challenge is…And you started off the last episode with a quote from Dr. Coughlin, who said, “We have a longevity paradox. We finally have achieved what mankind has been trying to achieve since we walked living longer.”

Now, the question is, what do we do with all that time? That’s exactly what 8,000 days is about. If you think about those segments, first of all, Patti, when people realize that they may be retired for as long as they were alive between birth and graduation from college, wow.

Patti: All of a sudden, it becomes very real. Wow, what am I going to do with all that time?

John: Not only…

Patti: I went through so much during that first 22 years.

John: Yeah, not only are we living longer, we’re living better, but here’s the challenge. That, in the first three segments, the script has already been written. By that I mean, we know in the first segment go to school, get good grades, get into the college, the career, the armed services of your fancy.

When the second segment starts, everything is growing. Hopefully, your income’s growing, responsibility’s growing, your family may be growing, all until we get to the point, usually in your mid 40s to early 50s, when we pause, we step back, and say, “Wait a minute. Is this what I want for the rest of my life?”

We’ll kick that around for another 22 years, but it’s that last segment, Patti, that we don’t know how to conceptualize it because people living retirement today often base their vision of retirement on what they observed in their parents and their grandparents’ generation. The problem is our retirement today looks an awful lot different from that.

Patti: It is a whole different ballgame. I think that that’s one of the biggest issues that we find in the financial services industry.

As you know, I used to be a nurse. I was an intensive care nurse and dealing with the aspects of losing the comfort of a regular income and the concept of perhaps a declining health or cognitive health. Those two things coming together, and then having the ambiguity of, “What am I going to do with my time every day?”

It does create some anxiety that people often don’t realize until they’re in it, and then it becomes a whole new ballgame for them. It’s so very different than what they saw with their parents.

John: That’s interesting, Patti, because Dr. Coughlin has a study that he refers to where it states what concerns people most about retirement as we age. I’ll tell you, through age 65, I think, traditionally, the financial services industry has done a pretty good job because as most people guess, money is the thing that concerns most about retirement.

How much is it going to cost? How much income am I going to have? How much do I need to make it last? How much can I take each year? It’s all about the quantitative, but we see from age 65 to 75, money begins to be replaced by health care as our number one concern, or our physical health, I should say.

Here it would be a good thing to point out. The researchers at MIT say that aging should not be defined by chronological age. It’s really a factor of three primary resources we have available to us. What is your physical resource? How’s your health? Do you have the health to be able to enjoy the things you wish to?

What are your finances? Do you have the money to enable you to do the things that you want to do? Thirdly, the one that’s neglected the most, your social resources. How engaged and connected are you? There’s three resources.

I can tell you, Patti, I’ve met some folks who were 85 years old who are still in the honeymoon phase. I’ve met other folks who were 64, and unfortunately, entering some of their managing longevity stages that we’ll talk about later on this podcast.

Patti: It is very true. It is unique for each individual. It’s not something that, “Oh gee, I’m 65 years old and this is where I am.” It’s a case by case situation. I think that that is so important and relevant.

John: Interestingly, too. I mentioned that study. At age 75, money actually shifts down to the third point. Health is number one, cognitive decline number two, money number three, because as we age, we start to set in with, “What good is the money if I can’t enjoy it the way I intended?”

Patti: What my experience has been is it becomes less relevant, and yet, they do worry about their own cognitive decline and their ability to manage it properly.

I find that a lot of times people will come in, couples will come in, and even if the couple, one person is relatively healthy, the other one is not…They want to make sure that if the not so healthy person has always been managing things, that they have a go to person to help them, and make sure that everything continues as seamlessly as possible.

Once they have that comfort and that peace of mind, then they can go on and live their life, and deal with some of the other challenges that they might have.

Let’s go back to the other 8,000 days. The MIT AgeLab, which by the way, again, if you listened to the first segment, or if you didn’t, go back and listen to it.

It’s amazing, some of the things that John has brought to our attention in terms of what the AgeLab has discovered as issues that you may not realize until you listen and understand, in terms of the decisions that people make, and how retailers, and how financial services and health care needs to change to accommodate the things that are happening as people age.

Let’s go back. The one study that the MIT AgeLab did is phenomenal. It’s the age you peak at everything. For example, brain processing power, I never would have thought that with four kids, that they peaked at age 18.

John: [laughs]

Patti: To me, they had no common sense.

John: I always joke with people remembering names. Sometimes we worry ourselves. We say, “Gosh, I can’t remember names anymore.” Guess what? If you’re over age 22, that’s perfectly normal, but you say, “I’m really concerned. I can’t even remember faces anymore.” That’s age 32. [laughs]

Patti: Wow. OK, I don’t feel so bad now, John. Thank you so much. That’s amazing. When salaries peak…Life satisfaction, let’s talk about that.

John: Yeah. The interesting thing about life satisfaction in this study is it’s the only data point that repeated twice during the lifespan. The first time life satisfaction peaks is age 23. Most of us are probably getting started on that exciting phase of our life.

The world’s our oyster, all the avenues are open, not a lot of obligations, just getting started. It’s exciting, but the interesting thing about that time is we seem to have a lot of time, but we don’t have the money to do anything with it. [laughs] We make the most out of it that we can.

Interesting, life satisfaction peaks again at age 69, so age 23 and age 69. If you ask, “Age 69? Why?” It’s when the researchers would say that you’re probably at your highest average of those three things that I talked about.

You probably still have a good amount of your physical health. You have built some financial assets, and now in addition to having some time, you have the money that you can put towards that time. Thirdly, you’re still pretty healthy in terms of your social engagement, your friendship circles. You may still be working, or volunteering, or whatever it may be.

When I say this, people think, “Wait a minute, I thought you said as we get older or we get these health issues that…” Yeah, you may, but what’s even more interesting…Two more data points for you, Patti. My favorite, happiness with your body peaks at age 74.

Patti: I love that one. I thought that was phenomenal.

John: I’ve told myself at that point, you got to play with the hand you’re dealt.

Patti: Absolutely.

John: It finally hits home. Lastly, psychological well being, “Tomorrow is going to be better than today,” peaks at age 82.

Patti: To me, that seems counter intuitive. Why is that, John?

John: It is because you recognize the things in life that are really important as you begin to take mortality into account. You allocate your time towards the things, hopefully, that mean more than some of the other stuff that we worried about at other points in our life. We have the time and the assets and the resources to devote ourselves to things that mean something.

Patti: You know what word comes to my mind, John?

John: What’s that?

Patti: Wisdom.

John: Absolutely.

Patti: That is, to me, everything. When you’ve lived your life and you’ve seen so much, you’ve probably gone through a lot of things, it could be with family, etc. You get to the point of time and you understand that, “You know what, at the end of the day, does it really matter? What really matters?” To me, that’s what wisdom’s all about.

John: For sure. It’s pattern recognition more than particulars, getting to recognize situations and understanding. What you’ll hear from people who are more seasoned, typically, is rather than running around with their hair on fire. They’ll say, “If it’s the worst thing I ever face, the head will be a blessing.” We’ll cross that bridge when we come to it.

Patti: What a wonderful thing to be able to say.

John: Absolutely.

Patti: Let’s talk about the four phases of retirement. Again, perfectly defined. I see it every day. I’ve never seen anybody define it as well as you have, as well as Dr. Coughlin at the AgeLab. Let’s talk about the four phases.

John: Sure. Let’s start with the first phase, which we call either managing ambiguity, or it’s also known as the honeymoon phase. The first phase of retirement is the thing where everybody usually thinks of. “I can’t wait. I’m gonna take more trips. I’m gonna go see the grand kids.” The key is flexibility. Thinking about how we’re going to spend our time.

Here’s the thing, Patti, is that one of the major issues that we’ve seen people wrestling with now, in that initial phase, is the role of work. I know what you’re saying. You’re thinking, “Retirement used to be defined by absence of work.” Not anymore.

What I’m going to tell you is what we see is that 34 percent of American state, they’re actually 65 percent say, “I’ll work past age 65.” 34 percent say, “It’s not about the money. It’s about the social engagement. It’s the identity. It’s the purpose. It’s the mission.”

Patti: I see it every single day and it is so important. We forget the importance of that interaction with people at work and how it helps to define our purpose. It gets us up in the day, etc.

John: A point here from a gender perspective, and this is generally speaking. This area of work and loneliness and isolation is hitting the male population more so than the female population.

Patti: I have had several clients who were high powered executives, Fortune 500, and we planned the retirement. We got them retired. They have all this extra time, and they went into a deep depression. I’ve had several people in my conference room and they burst into tears. They said, “I just don’t know what to do with myself.”

John: Because they’re supposed to like it but they don’t. In fact, for a gentleman, the second question he’s most likely to hear from someone he’s never met before after he’s asked his name is?

Patti: What do you do?

John: What do you do? Not just for 5 to 7 years anymore, 15, 20, 25 years. Patti, I’m not telling you, you’re going to work like you worked for the first 30 years of your career. You’re going to want more flexible work. You’re going to want more control over your schedule.

You may only want to work 15 hours a week not 60, or you may want to work for a cause that you believe in aka volunteering.

Somehow, in this ‘60s to ‘70s time frame, when I’ve got all those resources I’ve talked about, “I’ve got tremendous skills. I’ve got people skills. I’ve got institutional knowledge. I’ve got work ethic. I’m not ready just to retire to the rocking chair.”

Patti: I will tell you, to me, one of the biggest mistakes that large companies are making is forcing these people to retire. Think about the experience and the resources that they represent over their lifetime and you’re going to just push them out the door. I think it’s crazy.

John: Especially now when you look at US workforce demographics. We’re running up against the labor shortage especially in skilled marketplaces. You’re going to find companies wanting to retain their aging employees.

Also, let’s not forget those employees are usually the culture carriers of your company. They teach the younger folks who were coming on board the importance of why the company does what it does, not just how they do it.

Patti: Great, great point. The other part of it is the change in the family dynamics in that first phase.

John: Sure. In the honeymoon phase, when it starts, you’ll probably find yourself providing more financial support to your aging children than you will your aging parents, but at some point in this honeymoon phase, it will transition. You’ll turn around and notice that mom and dad need a little bit more help.

Remember that help may not just come in the form of making sure that they’re taking the proper med. It’s a tree falls in their yard who make sure that’s cleared out of there. Who’s checking in on them to make sure that they’re safe in the home? Oftentimes, this is a loss of productivity.

As we think about what our retirement plans are, I think Patti, I’m sure you do this with your clients, is thinking about the role they play in their own family. Will they be a primary caregiver, the spouse, another family member, mother, or father? It’s important to take in consideration.

Patti: Again, because people are living longer. We talk about the sandwich generation as it relates to people in their 50s. People who are retired are still in that sandwich generation where they’re taking care of, in some cases, their own parents, their children, and even grandchildren.

Think about the implications, both financial as well as personal, what that could mean for that retirement experience.

John: The last thing that happens during this phase, as I say, it’s where the rubber meets the road. For years, we’ve worked with you, Patti, that help us understand how much income will be coming in? What were our expenses look like? The truth is, it’s pretty hypothetical. It’s not hypothetical anymore.

Patti: It’s very real and that becomes real scary.

John: [laughs] It becomes real. We don’t have to guess at it anymore, but it may take us a few years to figure out what in reality it is. That all takes place during this first phase, if you will, the honeymoon phase.

Patti: The next phase is the big decision phase. Boy, we see it all the time. Again, it’s so important that we recognize that’s a phase. We need to make these decisions.

John: In the big decision phase, it’s usually when somebody says, “It is time to cut back in what I was doing for work or volunteering.” We have to make some decisions. On the first podcast, Patti, we’ve talked about the three questions, the ice cream cone and the light bulb, and who am I going to have lunch with?

In this phase, those are the three questions that could become really important. Where are we going to live? Are we going to move closer to family? Are we going to move to a place where we always wanted to live? Is there access to the things that we want to do?

Yes, medical care, but also entertainment and dining options. You name it, anything is physical activity. We have to remember that. I think this is partly where ageism has seeped into all of our lives.

People who are in their 70s, 80s, and 90s are still real people that have activities and ambitions, and things that they want to do. We can’t let our environments limit us.

Patti: It’s really important to ask the question because oftentimes people will come in and say, “We’re thinking about moving close to the kids.” They live in Virginia or they live in California.

I always reflect that back to them and say, “It really would be nice to be close to the kids. What’s it going to feel like when you move there and you’re not near your friends? How’s that going to feel? You’re going to have to have new doctors. How does that feel to you? Does it intimidate you? Is that going to be OK?”

Some people are very comfortable with that. They’re very gregarious. They make friends easily. There are others who, they’re home buddies. They watch television. They don’t necessarily have or need a big social network.

That’s a whole different ballgame, but people don’t often think about that. They’re going to move close to the kids, but what else does that mean in terms of their quality of life?

John: What happens when the kids get transferred, move out of town to the next location? Your point, it’s not easy to make new old friends. In fact, it’s virtually impossible.

I ask people to think about the communities within their community that they’re attached to, if it’s a faith community, if it’s a community organization, if it’s friends, well then maybe there’s a way they can try out that new area before they make the drop decision on, “Well, let’s move there.”

Maybe they can long term rent there for a season where they are near their family, but they can start to investigate. Where are the doctors? Where are the grocery stores? Where are the entertainment venues? Where can we start making some friends before we even move into that community?

Patti: John, I can’t even tell you how many times I have that conversation and encourage people not to go ahead and make a permanent decision on something that could turn out to be temporary. It is perfectly fine to rent.

In some cases, it’s much more cost effective because you also don’t have the things that come along with homeownership including the transaction costs and things of that nature. That’s really interesting. Anything else in the big decision phase?

John: No, I think again, revisiting that your first podcast episode where we talked about those three questions, housing, transportation, social connection, biggest things in that phase.

Patti: Now we’re in phase three, navigating longevity.

John: In navigating longevity, it’s usually signposted by the fact that someone needs a good amount of caregiving. Could be a spouse who’s providing that caregiving could be an adult child who’s providing that caregiving. Depending on where we are in that. Caregiving, as I mentioned earlier, is more than just making sure mom and dad are taking the right medications or eating right.

It’s everything associated with it. During this time, if you’re working and you’re providing caregiving, you’re going to find your productivity challenged because when mom or dad need help, it’s not always exactly scheduled.

Patti: I will tell you John my own personal experience. I remember when my mom moved close to my home because the home that we all grew up in was too big for her to handle. Dad had passed away, so she moved close to my home, and she was literally between my office and my home. It was really interesting. It’s really hard to take care of another human being.

There were a couple of instances where I was in the conference room, and we had this code, and I got the code, I got the alert, and my mom was stuck. I needed to leave that meeting right then in there, get in my car, blast over to get my mom to rescue her from whatever it was that she was going through.

That happened a fair amount of time, and it made me realize how hard it is to really do this on an ongoing basis. It was also a very difficult thing for me to admit that maybe I wasn’t the right person for her to be close to.

That my life had taken on. I have four kids. I have a business. We had to make a different housing decision for my mom. She moved down to Florida to be closer to my brother because he was able to be a little bit more flexible. I got to tell you, I felt terrible about that. I felt so guilty because I’m the girl. I’m the nurse of the family. I’m the financial person of the family. It’s an interesting thing to wear both of those hats. Yet I wasn’t able to do for my mom what she really needed.

John: Well, and even for the person that does, Patti, I’m sure that you’ve tried to help people through connecting them with resources that can help. In my own situation, my grandmother lived with my mom for years. It wasn’t just the physical aspect of caring for my grandmother. My grandmother aged and she started to lose it a little bit on the fringes of her mind and memory. She would accuse my mom, perhaps, of stealing things. There was the mental part of it.

At the same time, this is a parent child relationship. We always tend to look at our parents as though they were age 30 and we were age 15. We have that respect, that love for them. Yet it changes. It takes a certain mental toughness to be able to stick this out.

I will say, Patti, I think one of the most underappreciated aspects of working with competent financial advisers is getting to learn about the experiences of other people, like me.

Patti, I know you’ve helped a lot of people. I know you, yourself, have dealt with some of these issues. Being able to share those things. “Hey, if I could do it all over again, here’s something I wouldn’t change” or “Here’s a couple of things that I would change immediately, that I would do differently.” That kind of insight to someone that’s in that kind of position is worth more than gold. Again, that comes from either the person needing care or the person providing the care.

Patti: It’s interesting. I often tell people that when I take a look at over the 30 plus years that I’ve worked in this industry, we have literally helped thousands of people retire and stay retired with peace of mind and financial security.

You get to do it once. Don’t you want to work with somebody who has pretty much seen almost everything and not have to experiment and make the mistakes that so many other people have already made? That, to me, is the most important thing.

This is not about Patti Brennan. This is about the industry in general. Again, kudos to the MIT AgeLab that’s bringing in all these insights to make us better at doing what we do for our clients. Kudos to Hartford for partnering with them and bringing this to financial advisers throughout America. It’s important. It makes a huge difference in the quality of life for our clients.

To me, that’s what it’s all about. I tell people all the time, “This is not about your money, it’s about you.” That experience and making sure that they get to live life on their own terms is my purpose to why I do what I do.

John: Absolutely.

Patti: We’ve gone through the first three phases. Fourth phase which is…Boy, wow, what a phase this is.

John: The fourth phase is called the solo journey phase. Obviously, it’s nothing that any of us look forward to, but the researchers at the AgeLab do remind us. Aging is usually not a team sport.

It’s usually a high likelihood that one of the two in a committed relationship wind up aging by themselves, divorce, widowhood, never married in the first place. Now that we’re living into our 90s, it’s something that we need to think about and prepare for because we can stick our head in the sand.

Pretend it isn’t going to happen, but that only makes it more difficult to deal with that and when it does. In this stage, Patti, the survivors really called to reinvent themselves.

It’s interesting because depending on what stage of life it happens, what their physical, financial, and social resources are, they may be thrown into back and to one of the other phases. You may be asking questions, “Where do I want to live? Am I going to go back to work?” All those things, but social interaction is so important at that phase.

Patti: It is so very, very important. To me, the most important thing is to recognize that that’s a possibility and to really, really know the questions to ask. Nothing has to be decided upon right away. You’re dealing with the grief. You’re dealing with the loss. I have a wonderful, wonderful client.

She’s just the greatest and she was a sudden widow. I thought it was so interesting. I was checking in with her. I gave her call. Just wanted to see how she was doing, and she said, “You know Patti, the one thing that I never realized about John is how loud he was.” I’m like, “Really?”

She said, “Yeah, the house is just so quiet. When he was here, he’d be upstairs. I could hear him walking. I could hear him pulling the chair out in the office. He was clanking. The TV was on. He’s opening the refrigerator, and now it’s just so quiet.” I said to her, “What are you going to do to create sound in your life?”

She thought that was such an interesting question, and I said, “It’s not so much about the sound. It’s about the people that you’re surrounding yourself with. I just want to make sure that as difficult as it is, to make sure that you’re going out, that you’re not isolating. It’s hard to go through this grieving process. There’s no perfect way. It’s different for everybody.”

I said to her, “I just want you to know I’m available any time you come over the office. You need something to do. Believe me, I’m going to put you to work. I’m going to have you photocopy whatever it is, but just occupy yourself to get you through this difficult period of time.”

John: I think the number, Patti, is something like 40 percent of women over age 70 are currently aging by themselves. As we think about divorce, widowhood, never married in the first place. This is where it comes in to the study of longevity because we’re living into our 90s.

The average age of widowhood in the United States, I believe, is right around 59 years old. People hear that and say, “My god, it’s so low.” What happens is, men tend to marry younger, especially subsequent marriages. They tend to marry quite a bit younger, mixed mortality in there. You have this and it never fails, Patti.

I’ll be speaking at a public event. There will be two ladies sitting up front.

They’ll come up to me afterwards, and say, “John, I can’t believe you just said that. I’m 53, she’s 56. We were both widowed in the last year. Let me tell you what we’ve been going through.

“The reinvention of self, obviously, as you said, the grieving period has to happen, but realizing that there is still life out there for you, and realizing often that your spouse would want you to take advantage of that is sometimes the impetus that get back in the game because that game could last another 20, 30 years.”

Patti: John, I am all about the hope. I’m all about the perspective of, “This is a terrible time you feel awful and it’s the pits.” We’ve gone through this with so many people, and you’re probably not going to believe it when I say it, but it is going to get better.

Your life is not going to go back to ever what it used to be, but it’s going to go back into a new normal for you. What we’re going to do together is to figure out what that looks like for you.

John: Patti, I would come back to recap what we talked about at the beginning of this episode. Psychological well being, “Tomorrow will be better than today,” continues to improve, generally speaking, through your early 80s, which means that this improvement may actually encompass things like widow or widower hood. It may encompass your own physical issues.

Again, being able to recognize patterns and being able to look for the hope, as you mentioned, in the life that lays ahead and the opportunity, is a reason for optimism.

Patti: John, thank you so much. This is fascinating. We’re going to stop here because I want our listeners to know that in the next podcast we are going to be really digging into the practical things that people can do because you know me. I’m very action oriented.

We’re all about helping our listeners, helping our clients, helping other financial advisers provide a client experience that makes a difference in the quality of their lives.

In the next episode, we’re going to be talking about the practical things that we can do, thanks to the MIT AgeLab, Hartford, and John Diehl, that we can learn and apply on a day to day basis to really make a difference for our listeners and the people that they love the most. That wraps it up for today. Thank you so much for spending your time with us.

If you want to learn more about the insights that we’ve gained from the MIT AgeLab, just head over to our website at keyfinancialinc.com. You can schedule a call with me. By the way, be sure you hit the subscribe button if you liked today’s episode. Turn on your notifications. Share it with as many people as you want. This information is really, really important. That’s why we do it.

Let us know if there’s anything else that you want to learn about. Until next time, I am Patti Brennan, and we will see you in the next episode. Thank you so much.

Ep13: MIT Age Lab’s Top 3 Questions Anyone Over 45 Should Be Asking

About This Episode

John Diehl, Senior Vice President of Strategic Markets for the Hartford Funds joins Patti to discuss his work with the MIT AgeLab. In this first part of a 3-part series, John reveals the top 3 questions anyone age 45 and older should be asking themselves on a regular basis. The questions will surprise you as you hear about the technological advancements MIT is working on to help answer them and allow seniors to age in place.


Patti Brennan: Hi folks, 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. I am really, really, really excited about today’s podcast. Today I have with me John Diehl. John is Senior Vice President of Strategic Markets for the Hartford Funds.

John is working directly with the MIT AgeLab. He has come today to bring us the insights that MIT’s AgeLab has discovered, if you will, as it relates to retirement and the aging process. Thank you so much for joining us, John.

John Diehl: Thanks for having me, Patti.

Patti: Absolutely. I think that this is such an amazing initiative that MIT has taken. Let’s talk a little bit about what they’re doing. It’s within the MIT School of Engineering Systems Division.

Basically, what I understand that they’re doing, John, is they’re really digging deep in learning about the challenges and the opportunities that come along with longevity. They’re trying to identify behavior, decision making, and the trends that are occurring in America as it relates to demographics, technology, and lifestyles.

John: That’s right, Patty. In fact, there’s about 40 researchers that are part of the AgeLab. They’re not just all engineers. There’s sociologists, psychologists, a whole host of ologists, who are studying everything about longevity and how it’s impacting product design, delivery mechanism, and especially for us, advice and value, especially in the financial services world.

Patti: It’s amazing. I love this quote from Dr. Joe Coughlin, who’s the director of the lab. He said, “We have a longevity paradox. Now that we’ve achieved what human kind has tried to achieve since it has walked, living longer, we don’t have a good idea of what to with all that additional time.”

John: Patti, it’s funny. Today, if I have two 65 year olds, a husband and wife, both again age 65, there’s now a 43 percent chance that one of the two will live to age 95. I usually don’t have to share with the ladies who the odds are in favor of there, right? When we think about extended longevity, that’s what we’re talking about in the study with the AgeLab.

How is the fact that we now may live into our mid 80s, upper 80s, 90s, and beyond influence the decisions, the circumstances, and the environments we may find ourselves in as we age?

Patti: It’s amazing because what I’ve learned from you and the AgeLab is that it’s not just the financial decisions. It’s the living decisions. Where am I going to live? Who am I going to be near? We see it every single day when clients come in to meet with us.

We’re running projections. What if you stay in your home? What if you decide to downsize? What if you want to move to be near the kids? These are important decisions that people have to make at a vulnerable period of time.

John: Well, what I usually share with folks, Patti, is forget about investing, planning, retiring, anything like that. Let’s say, there’s a jigsaw puzzle in front of you. Our job is to assemble that jigsaw puzzle. If that’s the case, where should we start? What do most folks say? They’ll say, “Find the corners. Find the straight edges.”

Sometimes, they’re like, “Ah, he’s trying to trick us. Flip the pieces over.” All important steps, not the most important first step, which is…?

Patti: Looking at the picture on the top of the…

John: Picture on the box, right?

Patti: Exactly.

John: Now some people say, “If you look at the picture, that’s cheating.” I say, “If you don’t, it’s insane.” What MIT shares with us is that most people have no idea what the picture on their box looks like beyond the next 24 to 36 months. Time frames are becoming shorter all the time.

Patti: They sure are. Life has a way of throwing some wicked curveballs. You’ve got to look at what’s your ideal scene. Then, what if that doesn’t quite work out the way that you had hoped?

John: Absolutely. If we were dealing with the puzzle, the picture never changes. We know, as life goes on, things change, people change, goals change, ideas change.

Patti: What I have learned over time is that people don’t always know the opportunities and the options that they might have. It’s hard to know everything about everybody, and what’s available out there. I think that it’s fascinating to see what the AgeLab has identified as the important metrics, the important decisions, the important things to take into consideration.

Also, within the framework of what’s happening to that person as they begin that aging process? There’s a lot that goes on. I see it every day when people are thinking about retirement. They’re in that zone of we call it the red zone the five years before retirement. They’re just beginning to think about it.

We do that brainstorming activity to bubble up some of the issues that they may not have thought about.

John: Absolutely.

Patti: I’m curious. Dr. Coughlin is such a renowned expert throughout America, and that AgeLab is a fascinating…It’s just amazing what they’ve discovered. Is there anything particular that stands out for you?

John: Well, I just think that the unique way that they research. I’ll just share with you one tidbit that, I think, is a lot fun. At the AgeLab, they have a suit that you can put on. The name of the suit is AGNES. Everything at MIT is an acronym. AGNES stands for Age Gain Now Empathy System.

I could take someone, regardless of their age, up to the AgeLab, dress them in the AGNES suit, and calibrate what it would feel like to be 80, 85, 90 years old.

Restrictive movements in the limbs, neuropathy, impaired vision. I know what you’re thinking. Who in their right mind [laughs] would want to wear a suit like this, right?

Patti: Wow.

John: Imagine if you were the senior management team of a large American retailer, let’s say, like CVS pharmacies, for example, which did this work with the AgeLab. You were concerned about whether your stores were laid out in a manner that would accommodate an aging US population.

What better way than to take the senior management team, dress them in the AGNES suit, dial them up to age 80, and go shopping in your own stores. If you go to visit a CVS pharmacy, you may notice some physical changes coming to the store.

One thing you’ll notice is that shelf heights will be lower. Patti, who do you think the target consumer is for CVS pharmacies?

Patti: I would think that older people. I don’t know. I’m going to come clean with you, John. I feel like I’m shrinking so that lower shelf is going to come in handy for me.

John: It is the aging female consumer, Patti. As women age, they tend to lose an inch or two in stature. Now, for your listeners, they wouldn’t be able to tell I’m only 5’3” tall, but let me tell you from experience, get me in a store where the products tower above my head. Difficulty accessing the top shelf, but also, I don’t know where in the store I am. I don’t know where I should be.

See, CVS was smart enough to know that your comfort in the store may actually impact your decision about whether you’ll frequent that store in the future. So they worked some of this research into store design.

That’s one of the unique things about working with the AgeLab, is that they’re not just working in financial services, healthcare, retail, automotive. There’s lessons that we can take from all of those industries.

Patti: It is fascinating. It’s such an important consideration as it relates to our population because more of us are going to be in that particular season of life. How do we all work and how do we all function as we get into that retirement and that aging process?

I think that is fantastic. I’m so grateful that Hartford and other companies are getting involved and learning about, gee, what can we do to make it easier for people as they go through this process?

One of the things, folks, that we’re going to be doing because I think this is so important is we’re going to do this as a series. In the next segment, we’re going to do a deep dive into the four segments and the four phases that people go through.

The first stage that I see so much is that managing the ambiguity. I don’t know what it’s going to be like when I don’t go to work every day. What’s that going to feel like? How am I going to replace my income? What am I going to do all day with my time? By the way, is my husband, or wife, or my spouse going to want to divorce me because I’m driving them crazy?

John: [laughs] Right.

Patti: It happens all the time.

John: Sure.

Patti: Usually, the spouse is sitting next to them and they’re nodding their head saying, “Yeah, I’m not so sure this is going to quite work out.”

John: That’s so true.

Patti: I think that’s fantastic. Now, one of the things that you’ve taught us is that there are three questions that they should be asking themselves. It’s fascinating the way you frame it.

John: The interesting part about the three questions, Patti, is that the MITH lab says, “There’s three questions anyone age 45 or older ought to be asking yourself on a fairly regular basis, if not about yourself then about someone that you care about, a parent, a spouse, a sibling, or a friend.”

The three questions, Patti, are going to underwhelm you with their simplicity coming from the rocket scientists up at MIT. They’re unique and there’s a reason for their uniqueness. The three questions are who’s going to change your light bulbs, how are you going to get an ice cream cone, and who are you going to have lunch with?

Most folks that come to see financial advisors, they already anticipate questions about stocks, bonds, cash assets, liability, net worth. When I start asking about light bulbs, lunch, and ice cream, they may not even know what I’m talking about, let alone understanding whether they agree or disagree with the points I’m going to make.

If it’s OK with you, I’ll touch on each of the three questions, explain their significance.

Patti: Let’s go with it. I think it’s fantastic and it’s so relevant to people who are listening.

John: Let’s talk about who’s going to change your light bulbs. 90 percent, that’s 9 0 percent, of Americans state that they’re going to age in their own homes. How many of us spend 30 or 40 minutes thinking about the changes, modifications, or services that may be needed to keep us in our homes until our 80s or 90s?

MIT says, “You may now move as many times after age 50 as you moved prior to age 50. You may downsize. You may move closer to family. You may move away from family. You may need to live with family.

You may need the care of a continuing care community, because, Patti, is it right to think that my wife at age 92 is going to be providing my care at age 92? We can all hope that, but, really, in this new age of longevity, it’s a misplaced expectation.

Patti: I see it all the time. We, literally, as we do the financial planning and we talk about those questions and where we’re going to live, a lot of people have the ideal scene they’re going to stay in their own home.

That’s what we can go in with, but we also run those alternate scenarios, because I’ve been doing this long enough. I know that chances are we’re going to hope for that. That will be the ideal scene, and we have to be prepared that. If they go plan B or plan C, that we’re ready to go with that as well.

John: It’s not even necessarily a black or white decision anymore. Housing may be a continuum, right? If we look at the average age person entering into independent living in one of these continuing care communities, it’s roughly age 83.

People are staying in their homes as long as they can, but, at some point, it may not be a tenable solution anymore. It may not be safe. Patti, I could share with you top 10 design changes for aging in place level entryways, kitchen and bath improvements, storage within easy reach but all 10 meant to prevent one thing in the home. What is it?

Patti: It’s falling.

John: A fall can change the picture on the box in a heartbeat.

Patti: Absolutely.

John: Thinking about the homes we’re going to live in, whether they’ll be able to accommodate us, what it looks like for us needs to be part of the overall financial plan. The time to check out communities where eventually we may need to go to is not when we’re in our mid 80s. Somebody gets a call and says, “Hey, dad just fell and broke a hip.”

No. It’s when we’re in our 60s and 70s, when we can express to family members, “Hey, here’s a place I could see myself in. I’ve done some of the digging on the financials. I know the services they provide. I could see myself here.” That first question is all about the home we intend to live in.

Patti: You know, John, I think it’s fantastic. I know that you have shared with us what those 10 things are. It’s so important, whether you are an individual listening to this podcast or you’re a financial adviser, because I do hope that other financial advisers are listening to these podcasts.

This podcast is for everybody. We’re all out here trying to do the best thing we can for our clients. I encourage anybody who’s listening to understand what those 10 things are to advise and make clients aware of them/ Also, to share with our clients exactly what you’ve talked about.

I know in our area one of the things that we have done internally in our firm is to look around our geographic landscape and get all of the continuing care communities in the area and their packets and understand their pricing.

How it works, the services that they provide, so that, when clients begin to talk about this as being an option for them, we already know the communities that are out there, understand what the costs are associated between community A versus community B versus community C.

Then that can begin that filtering process to same them time and energy. Again, to your point, long before they actually need it.

John: It’s not just for the individuals. It may be for their parents. It may be for a brother or sister, so on, and so forth. Again, it’s important to think about the social network.

Patti: Let’s go to the second question.

John: The second question, “How will I get an ice cream cone?” involves the thing that most people overlook. It’s when you think about the small things that, as you age, you want to maintain access to. What would those things be?

We’re not asking, “How are you going to get to your doctor’s appointment?” Somebody’ll figure that out. Now that we’re living to our 80s and 90s greatly increase the odds that at some point you may lose the ability to drive. If you do, how will you be able to access the things that make life worth living?

MIT tells us 70 percent of Americans live in suburban and rural communities, where, if they lost the ability to drive, their access to the things that make life worth living would be severely diminished.

As we think about this question, the question’s really about the communities that we intend to live in and how accessible is everything.

Secondly, our use of technology. We may not be waiting for our driverless car to come by, but maybe there are driver services available on the Internet right now that could help us the Ubers, the Lyfts, and like services like that.

Patti, I do always share with our male clientele. For the men, if you want to be a Casanova of your senior living community, there’s one skill that you want to keep sharp as you age, and it’s not dancing.

Patti: Oh, absolutely. I get that.

John: [laughs] It’s driving.

Patti: You bet. Absolutely.

John: If you can drive at night, rock star status, right?

Patti: [laughs]

John: Who was the most popular kid in high school? He was the one that could borrow the keys to mom and dad’s car. Everybody piled in, and they granted us access, where we wanted to go, when we wanted to get there.

Driving, mobility, transportation, and access is independence, and independence is quality of life.

Patti: I think it is fascinating. It is a really important issue, because I’ve had a number of situations where we’ve noticed the changes in a client, got the kids involved, and the kids have shared that they are so worried about mom or dad continuing to drive. I could tell you stories of how difficult it was to take away the keys to the car.

I can tell you one family ratted on their mom to the doctor to say, “Look, mom cannot be driving anymore. Can you please make her go and take a driving test so that they take away her license, because she’s a danger on the road?”

It’s really hard, because you don’t want to take away that independence. To your point, as long as we recognize that that’s a possibility, what can we do? I think that, what Hartford has put together in terms of the resources…

You’ve got a guide that talks about the apps, the sites, and the devices that can change the way people age, and to continue to give people access to the things that are important to them.

John: Patti, I use an example. My mom is soon to be 78 years old, got her first iPad a couple of year ago. If I told her, “Mom, I got a great idea. Why don’t we download this Uber app, so you can load in all your personal credit card information, so you can get in a car with a guy you don’t know to drive you to a place where you don’t know where you’re going?” What do you think she’s going to say?

However, think about telling someone versus experiencing it with them. Get in the car with that loved one if you’re a user of one of these services. Show them how it works. Show them how much it costs. Talk to the driver. Ask the driver how they rate you. Show your loved one how you rate them.

By giving them the experience, you may offer a liberating idea to them.

Patti: I think it’s phenomenal. There’s a perfect example of taking an application and applying a practical approach to using the application until the person is comfortable with it, because, ultimately, there’s a lot of stuff out there that people don’t use because they don’t know how to use it. They’re not comfortable. They don’t want to look dumb, and all of those things.

The idea of going in the car with mom or dad, and experiencing it with them makes all the difference in the world.

John: Absolutely.

Patti: One of the things that we do with our client events that we have scheduled is we’re going to have a technology event where we bring all of our clients together in a big, big room. Everybody is going to bring their iPads and their phones.

We’re going to go over these applications and do it together with our clients in the room, so that we all get to experience what it’s all about. I think it’s fantastic.

John: What’s great about that, Patti, is peer to peer learning takes place. It’s not just led. People say, “How do I find out what these things are?” You know what, you don’t Google them. You don’t go to the app store. You talk to your friends and family.

Patti: Exactly. It’s amazing also because one of the things that I’ve learned with all of this, that MIT has also taught us, is the importance of social interaction and bringing people together. Loneliness is a very, very real problem for people as they age.

John: We mentioned those three questions. The last of the three questions is, “Who will you have lunch with,” and Patti, you brought that up. That’s exactly what that question is referencing because, again, one of the most overlooked issues for people who age is the depth and breadth of your social network, your friends.

The AgeLab would tell us your friends do two really important things for you. They get you up off the couch, out the door, physically moving, giving you a place to go, and a reason to be there.

Secondly, mental stimulation a reason to circle the date on the calendar, things to look forward to.

Patti: Exactly. Boy, it is amazing. Let’s pull this together for this first episode. Can you give us a brief overview of what is the concept of 8,000 days?

John: For 8,000 days? I’ll just give you a brief intro. MIT says that your life today can be broken into four 8,000 day segments. It’s about 8,000 days from birth to graduation from college. It’s another 8,000 days ‘til your first mid life crisis. I said first because now we’re living longer. We may have multiples.

Patti: [laughs]

John: It’s another 8,000 days to the day you retire and another 8,000 days from retirement to experiment, on average. 8,000 days, just a little shy of 22 years, 22, 44, 66, and 88. The problem is the script has been written for the first three segments.

To that quote that you opened up with, nobody knows what that last segment is supposed to look like because it’s so dramatically different.

Patti: I can’t tell you how amazing that is to break it down that simply and recognize that there’s this outlier, that last 8,000 days, that the MIT AgeLab is really drilling down and learning more about so that we can make sure that people have the quality of life.

You work all of your life. You raise your family, etc., for this wonderful grand moment of retirement and, again, that ambiguity. What’s out there? What’s going to happen to me?

Taking a proactive approach to this last season of life is so, so very important, and people like you and MIT helping people to make that the life that they want to live.

John: It’s very rewarding.

Patti: Isn’t that what this is all about? Folks, that’s it for today. Thank you so much for spending some time with us. Come back for the next episode. John’s going to join us again.

We’re going to expand on these topics even further. If you want to learn more about this, just go ahead and head over to our website, keyfinancialinc.com. You can schedule a call with me. We’ll talk more about this and talk about the relevance of what we’ve learned in your personal situation or your parents, for example.

Please leave your comments. You go into the website, leave your comments. Let us know what you think about the show. What you liked or didn’t like, and what you want to learn more about.

Until next time, I’m Patti Brennan, and I will see you in the next episode with John Diehl.

Ep12: Protect Your Assets – Make Sure You Have The Proper Coverages!

About This Episode

Insurance can be complicated – how much is enough? Could you lose all your assets in the event of an unforeseen tragedy? Patti asks the hard questions with insurance expert, Neale Boyle, to help determine what constitutes negligence and how to protect ourselves with insurance. They give practical tips to make sure you are properly insured, and ALL your assets are safe!


Patti Brennan: 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.

Today, I have Neil Boyle with me. Neil is the president/CEO of his own agency. It’s the Boyle Insurance Agency. What I appreciate about Neil’s approach, they are an independent agency specializing in auto, homeowner’s, and umbrella liability insurance. Neil, welcome to the show.

Neil Boyle: Thanks for having me, Patti.

Patti: Yes, it’s so great to have you here. Let me tell you folks a little bit about how this came about. Neil and I both have sons who are the same age. They went to school together.

We were talking about the kids and the boys, and the conversation took on a life of its own.

I was saying to Neil, the thing that always worried me, whether it was related to my own family or our clients is that a lot of people don’t realize that with young children, young drivers especially, that if, for example, our sons, let’s say that it was my son, gets his driver’s license, goes out with his friends, makes a bad choice, chooses to drink and drive, gets into a car accident and kills a young family, that we are completely liable for that behavior. In other words, we’re going to be sued for everything that we’re worth.

That is a really important fact that a lot of people don’t realize.

Neil: Absolutely. The umbrella policy that you can get for excess liability in a situation like that on top of the coverage that you have on your personal auto policy, generally, the underlying coverage needs to be about $500,000 on the auto policy in order to be eligible for the umbrella.

That would certainly come in handy in a situation whether it’s a young driver or you’re 35 without children, but you have assets to protect. You’ve worked so hard to build up that asset allocation that the umbrella policy can be a helpful factor.

Patti: It’s interesting. This is another side story, Neil, that we didn’t talk about.

I used to play field hockey when I was a young college student. I was out on a golf course one day, and the golf course happened to be on a road or one of the holes was off of a road. To make a long story short, I can hit the ball. It just doesn’t go straight.

Neil: [laughs]

Patti: Of course, it ended up going right into the windshield of a driver going 50 miles an hour. Now, by the grace of God, she did not get in a car accident. When I realized that she very well could have, from this golf ball that I hit. I actually called my insurance agent and said, “What would have happened if she had sued me for everything?” I wasn’t driving a car.

Fortunately, I learned that that’s where the umbrella policy also would have kicked in. It can actually cover things that you never would have thought of, like being a terrible golfer like Patty Brennan.

Neil: Absolutely. The ability to speak to an agent about those types of situations to explore the different types of situations where an umbrella or the liability could kick in, wherever you’re negligent. If you’re negligent in any type of situation, whether it’s hitting a golf ball or driving a car, the liability can certainly come into play.

Patti: It’s funny because you use the word, negligent. I don’t know. Yes, I was probably negligent in the fact that I should not have been on a golf course.


That is definitely the case, but it was an accident. I didn’t mean to hit it into her windshield and yet it still happened. People can be at your home, and they could trip and fall by no fault of yours, but they’re going to sue you anyway for everything that you’re worth.

Neil: Gross negligence doesn’t necessarily mean it was done on purpose, mainly it is accidental. A situation where you have a young driver, we see it every day, the frequency and severity of those accidents are a pain point from a pricing standpoint, an overall pricing standpoint of the policy and from a severity of the amount that we pay out on claims.

Patti: You’ve brought up an excellent point, the price point. Again, I don’t think that you are ready for all these examples, Neil…

Neil: It’s all right.

Patti: …but I’m going to give you these examples because I have lived it, either personally or with our clients. It’s really interesting. This is another example where I didn’t realize these unintended consequences. My son, Jack, goes to college out in California.

Being a mom, I’m thinking I’m going to teach this kid how to be responsible. We go out. We buy him a jalopy for him to drive at school because he’s living off campus. He has to get to school, and Uber was killing me. I figure, let’s buy a cheap car for him to drive back and forth to school.

Being the mother that I am, I thought I’m going to give him some skin in the game. I had him go ahead and research car insurance out in California. He went ahead and did it. Like every young child, he doesn’t call anybody. He goes on the Internet. He gets a car insurance policy and gets whatever coverage or what have you and one thing leads to another.

The following year, I get our umbrella liability bill. Sure enough, our umbrella liability policy was through the roof. I paid it because I’m busy, didn’t think twice about it.

The following year, our agent called me and said, “You know, Patti, Jack’s got this insurance policy with a different company. Did you know that if you bring that with our company and you have it with us, it will reduce the cost of your umbrella by thousands of dollars?”

I had no idea. Not only did it pay for the cost of his car insurance just by the reduction in the cost of the umbrella, we actually pocketed about a thousand dollars ourselves.

Neil: The children definitely, the first look that they should have when they purchase insurance is to go to the carrier that their parents are with. That’s going to be most beneficial to them from a cost standpoint. Their parents have some experience with that company.

As far as the umbrella goes, being with a carrier other than the one that you carry the umbrella with, the pricing is going to be significantly higher because they do not have a control over those underlying claim situations. It makes it much more difficult to come into adjusting a claim on an umbrella when you haven’t adjusted the underlying coverage to begin with.

Patti: That’s interesting. I didn’t realize that, Neil. That’s a good point. I thought that they just wanted the volume and the insurance. The thought process behind it, they don’t have control over that first policy in terms of the underwriting of the first policy.

Neil: The umbrella policy only kicks in a situation where the limits are exhausted under the underlying policy, under your auto policy, your homeowner’s policy.

Patti: When you think about your coverages and where they might be, you don’t necessarily want to diversify your insurance companies because that’s going to result in a higher overall cost for your coverages. Also, and you could probably talk more about this, you’ll either have redundancies in coverages or maybe significant gaps, right?

Neil: It’s a pricing issue, certainly, that you want to keep all of your coverages with the same carrier because of some multi policy discounts that are involved.

Certainly for a coverage standpoint, you want the same company adjusting the underlying claim. If possible, you don’t want to have to go to an outside carrier to cover the umbrella on top of the homeowner’s or auto policy.

Patti: I think it’s also important for our listeners today to understand what is exposed in the event of negligence or an accident or something like that? In Pennsylvania and in most states today, not only are your retirement plans at work excluded from a liability…

In other words, if you have a 401(k) or a pension plan, you cannot be sued for those assets. They are protected under a law that’s called ERISA. Most states have also adopted that level of protection for IRAs as well.

When you think about how much of an umbrella you need, how much coverage you need, I think it’s safe to say, and you can pop in, the most important thing is you want to cover your net worth excluding your retirement plan assets.

Neil: Correct, and the typical amount of an umbrella policy is a million. A lot of companies will go up to $10 million, and if you need additional coverage on top of that, you can go to an outside firm or an outside broker to try to get that coverage.

As far as the amount that you need, everybody’s situation is different. That’s why if you go on the Internet and they tell you the intended amount of coverage should be this amount, it may not be the fit for you.

You need to look at your individual situation, communicate that with your agent regarding your assets, and then you can come up with a decision regarding the amount. The pricing on the umbrella is not as expensive as people think it is, especially if you can bundle it all with the same carrier.

It definitely is affected by the young drivers, or if you own additional properties, but the people will be very, very surprised when they go and get a quote on the umbrella coverage.

Patti: I can tell you from experience in evaluating different clients, you’re probably talking anywhere from $300 to maybe $1,000 on the high side for a million dollars of coverage.

Neil: Absolutely. Yes. We have policies under $200 for couples without any children, maybe one car, and they run an apartment. The pricing, people think of a $10 million umbrella being a huge expense, it’s definitely worth looking into.

Patti: When you think about what it covers, Neil, we’ve talked about it umbrella. In other words, your homeowner’s policy liability limits will kick in for the first, let’s say, $250 or $300…

Neil: Correct.

Patti: …and then umbrella is the next million. Let’s say, it’s $1.3 million in coverage, so we’ve got the home covered, you’ve got your cars covered. Does it cover boats? What are some of the other examples?

Neil: Boats, recreational vehicles, if you have secondary dwellings, a seasonal dwelling, or a beach home, or a place down in Florida, we can attach that to the umbrella policy.

Patti: They’re automatically covered or you have to make sure that your agent is attaching?

Neil: No. That’s part of the conversation that you should be having with your agent, letting him or her know about all those situations, all your assets, all your locations, and come up with a plan.

Patti: Boy, can you imagine if someone went out and got an umbrella policy thinking that they’re completely covered, got it on the Internet but didn’t happen to mention the house down at the shore or that they have a boat on the Chesapeake, and something happens? Just because they didn’t include it, it’s not covered. That would be a real tragedy.

Neil: A lot of times, with your insurance, you purchase it and then you forget about it a little bit. You have the umbrella, but you need to do an annual review. You need to speak to your agent about coming up with a plan for that particular year because life changes. The umbrella and the liability coverage needs to meet those changes.

Patti: We’ve talked about liability. What other things should someone look at in terms of their coverages? I think it’s interesting. I know in our neighborhood, one of the big things that has occurred in our neighborhood and for a lot of people, were surprised when the stucco issues came about.

These houses were built 10, 15 years ago and weren’t sealed properly, and now they’ve got issues with mold underneath their stucco. They were really disappointed that that wasn’t covered with most insurance companies.

First of all, the question is, is that just a difference between one insurance company versus another? Is that in the fine print of each policy? How do you even know the questions to ask?

Neil: The mold situation is one that’s really been scrutinized over the last 10, 15 years. As far as the coverage goes, in most cases, there isn’t any. Because most companies have the same policy language when it comes to mold. There are some policies that will provide some minimal coverage for clean up of mold.

You have to look at your policy and check the policy language for additional payments. Almost everybody’s insurance policy, almost everybody is going to exclude mold from the policy.

Patti: Was that also an issue after the hurricane Sandy and the houses at the shore…You’ve got flood insurance and that only covers $250,000. Basically, were the homeowners stuck with the rest? Did they lose everything?

Neil: Unfortunately, a lot of people were out on their own when it came to those types of situations. That’s another great coverage to discuss with your agent is flood coverage. Even though it may not be in a flood plain, you can see what’s going on at the Midwest this week, just with their flooding. Coverage of flooding is definitely a coverage that you want to talk to your agent about.

Patti: What is the max on that?

Neil: There’s no maximum. It’s based upon the individual situation and it’s underwritten by the government.

Patti: OK. That’s a really important tip. With global warming, whether we believe in it or not, if it is a factor, if that is a concern especially if you’ve made significant investment into your home that is really something to talk with your agent because it’s one of those random things that nobody can predict.

Neil: Again, the pricing on that is not as bad as maybe you would expect unless you are in a floodplain if you’re designated in the floodplain and you purchase a home there. The mortgage companies can require that you have the flood coverage. That’s going to be a little bit more expensive, but outside of the floodplains, you can get a good buy on flood insurance.

Patti: That’s really interesting. As we talk about this, it’s important to understand, philosophically, the purpose of insurance. Let’s try to get down to really brass tacks to keep it real simple. The purpose of insurance is to transfer risk.

It’s basically to say, “I don’t wanna take the risk of losing my home, so I’m willing to pay $1,000, $3,000, and I’m gonna transfer that risk to Neil’s insurance company. If something does happen, I’m gonna let them deal with it, so I don’t have to.”

It’s a risk transfer tool. Now, the question is how much of your hard earned dollars do you want to spend in having that ability to transfer that risk? Do you want to transfer some of the risk or do you want to transfer all of it? That’s where a really good agent can really come into play.

Neil: Most people, initially, want to have lower coverage to lower their price. The pricing is the main issue until they have to use it. Once they use it, then we see that they look to increase coverage, maybe higher deductibles, look to increase their liability limits.

Until they have to use it, the buyer is looking mainly at price where it’s our job to look at coverage and make sure that they’re properly covered.

Patti: It’s a really, really good point. As the insurance industry has evolved, I think that one thing that’s really important is to recognize that the pricing has to do with the claims experience of the overall company as well as, you, the policy holder.

Let’s talk a little bit about that because to me it’s a little foggy.

All of a sudden, I get this huge increase in my insurance bill. Is that because of what we did, or is that because the insurance company had higher claims than they anticipated? If so, what can we do as educated consumers to go in there and make sure that we’re paying a fair price that we’re not going to be victims of their poor decisions?

Neil: It could be both. The insurance company’s experience in that geographical territory is certainly going to dictate what the base rates are. Your individual driving habits, including your MVR, your Motor Vehicle Record, and any accident history will definitely have an effect on what your rates are.

You want to make sure that the insurance company has all the correct information, that they’re not applying an accident that, maybe, you didn’t have. Maybe, your Motor Vehicle Record is showing something on a speeding ticket that, maybe, was somebody else with the same name and you’re getting hit with it. To review all that information is very important.

Patti: How do you know, Neil? How do our listeners know which insurance company is best for them? Is there a huge difference in insurance companies?

Neil: One of the factors that you can use is the AM Best rating. They’re a privately held company out of New Jersey. They measure the ability of insurance companies to be able to meet their financial obligations, and they give a report card. You can go online and find out your company’s report card, whether it’s excellent or good. They’ll provide that information.

The other thing that you can research is JD Powers. Consumer Report usually has a personal insurance publication once a year. Generally, you can get great information. You’ll see the top tier companies from a pricing standpoint, from a customer satisfaction standpoint, and the claims experience.

Patti: That’s a good tip. Let me pull this together with one final question. As you’ve been doing this for a long time, are there any particular trends that you’re noticing, whether it be the purchase decision, the purchase experience, differences that you’re seeing in terms of what’s happening in America today?

Neil: For the most part, coverages have remained the same over the last 25 years. There is some tort reform. We haven’t talked about limited tort and full tort.

Limited tort, you forfeit your right to sue for pain and suffering. Full tort, you retain all your rights. Limited tort’s cheaper because you’re forfeiting those rights, something you need to talk to your agent and, maybe, your attorney about, too, when you make that decision.

The biggest change that’s gone on is the way people buy insurance, that they’re going online, that they’re not utilizing an insurance professional. They’re making decisions on their own, which initially may be fine. As they grow older and they acquire assets…

Patti: Life becomes very complicated.

Neil: …and things become a little more complicated, you’re adding drivers, you’re adding vehicles, and you’re moving locations I know we’re preaching to the choir here we encourage everybody to look into having a licensed professional.

Patti: The interesting thing about it is it’s not like going to cost them any more money. You get the added value of a human being working with you and figuring out how to optimize your coverage for the least amount of money.

By the way, it’s not like you’re paying that person a fee. They’re getting compensated from the insurance company.

Neil: That’s a bit of a misconception that if you go through a direct writer that yo’re saving on paying the commission of the agent. There may be some truth to that, but overall the pricing comes down to where you live, your credit, and your driving history. That, more than anything else, is the determining factors.

Patti: Neil, thank you so much. This has been enlightening. I so appreciate you joining me today.

Neil: Appreciate you having me.

Patti: Absolutely. To summarize in terms of action items, first and foremost is to number one, understand the coverage that you have and make sure that there aren’t any gaps in it.

Number two, if you’re not working with an agent, it might not hurt to get an extra set of trained eyes to take a look at all of your coverages and make sure that they are what you think that they are, and make sure that you’re not paying too much.

Then number three, always be aware of where your liabilities might exist that you may not realize. If you are a golfer and if you golf like Patti Brennan, you may be taking risk that you didn’t even realize you had.

Neil: It doesn’t cost anything to call your agent, or if you’re shopping for insurance, it doesn’t cost you anything to talk to another insurance company about their rates, their coverages. Don’t let price be the only factor, certainly it’s a factor. Don’t let price be the factor, coverage is number one.

Patti: You got to understand it. The most important thing is understand what you’re paying for.
That’s it for today’s show. Thank you so much for spending some time with us. If you want to learn more about property, casualty, homeowners, car insurance, etc., just head over to our website, keyfinancialinc.com. You can schedule a call with me. We can introduce you to people who can help you in this particular area.

Also, be sure to hit the “Subscribe” button if you liked today’s episode and be sure to turn on your notification so you don’t miss a single episode. Leave us your comments on the show. We’d love to hear from you.

Until next time, I’m Patti Brennan. I’ll see you in the next episode.

Ep11: Optimizing Cost Saving Opportunities with The Affordable Care Act

About This Episode

If you are considering enrolling in the ACA, find out how you can structure your income to take advantage of cost-saving programs and tax saving strategies. Patti and her Chief Planning Officer discuss how assets have no impact on eligibility to get a premium tax credit under the ACA – a little known fact!


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.

With me today, once again, is Eric Fuhrman, our Chief Planning Officer. The topic today is on the Affordable Care Act. One of the things that I will tell you about Eric Fuhrman is this is a man who takes a subject and takes it deeper, and deeper, and deeper than anybody I know.

When he does this, and the benefit that we get, and hopefully you get, we learn things and are able to apply these concepts to your day to day life. I mean, it’s just incredible. Wait until you hear about some of the things that we would like to see many of you benefit from this year.

Eric Fuhrman: Wow. [laughs] Thank you, Patti. I appreciate it. Most people that know me would say I’m usually one that is not for a lack of words. That’s very nice of you. I think anyone that’s listening to these podcasts would know that I am absolutely delighted to be here and can’t wait to dive into another.

What we believe is a really interesting topic that can have a real impact for those out there in our audience.

Patti: The reason this became really evident is that what we have found over the last few years as we do our year end tax planning and financial planning initiatives is that we’ve discovered a subset of clients who are covered under the ACA, receiving or anticipate signing up for it.

Whether those people had retired early or maybe widowed or separated. As we were learning more about the ACA, we realized there are unique planning opportunities that a lot of people may not realize. Basically, today we’re going to talk about the Affordable Care Act and some statistics, and then explain how the premium is actually calculated.

We’re going to go over some investment in tax strategies that you got to be careful about because they might have some unintended consequences, and then really hone into the sweet spot. What are the steps that you can take to capture the best premium credit?

Eric: Patti, I think it’s so interesting, just to fill out the narrative there, is that, as we were going through your tax planning, we really just stumbled over this because normally we’re engaged and thinking about how can we do a Roth conversion or maybe do some really interesting tax strategies?

The focus is always on taxable income. We realized these folks out there and our client base that are on the Affordable Care Act, taxable income is not the number that you want to focus on and they really need some unique planning strategies.

Patti: It’s an important point, Eric. Why don’t you explain to our listeners exactly how that’s calculated, because it’s very different than how you would normally figure out adjusted gross income, for example?

Eric: Yeah, I would love to. For those of you out there, you might be hearing this term Affordable Care Act. You are probably wondering what’s that. Is that some new law? No, this is what is known as Obamacare. It was branded that way. That’s not the official name of the law.

We’re not here to pass judgment on the merits of the law or issue any kind of opinion, one way or another. Just to explain what it is and those of you that have health insurance for the market place to be sure…more so than anything being aware of how your income can affect your premium tax credit.

Basically, this is a law that was very controversial, but the key provision is really to extend coverage to millions of uninsured Americans, as a means to lower cost and eliminate some industry practices like denying people on the basis of preexisting conditions.

What we’re going to talk about today is really how is the premium taxed credit, the subsidy determined, as well as cost sharing subsidies depending on the type of plan you select. Patti, why don’t you bring us into the next part about some stats?

Patti: I think it’s really important that people understand, that this is affecting a lot more pre retirees than I think people realize. For example, close to 12 million people who are under the ACA, 29 percent of those people are 55 years and older.

There’s this subset of people who again may have retired early or may be widowed or widowers etc., who are receiving the benefits of the ACA. We’re going to talk about some strategies so that you get a higher premium offset from the subsidies. Eric, why don’t you take us through exactly how the calculation…How that’s determined?

Eric: It certainly came as a surprise to us, that assets have no impact whatsoever on your eligibility to get a premium tax credit under the Affordable Care Act. Neither does your 2018 income. It has absolutely nothing to do with it. It doesn’t matter how much money you’ve made.

Patti: In other words, if you made, for example, a million dollars in 2018, and if you have $5 million sitting in retirement account and another $2 million in a regular account, those people can qualify for the ACA with a significant premium offset?

Eric: They can. I still remember this day when we made the phone call to healthcare.gov. I almost fell out of my chair when it came to that realization that that’s how it was done, but you’re absolutely right.

When open enrollment happens, which is November 1st until December 15th…Unfortunately, open enrollment is over for 2019. What happens is if you’re a new enrollee or an existing enrollee in the Affordable Care Act, you basically have to provide an estimate of what your 2019 income is going to be.

A lot of the websites will tell you to use last year’s adjusted gross as a starting point, but if you’ve gone through some kind of life change or so forth, that may or may not be a good starting point. It’s a recommendation.

It’s based on your estimate because what happens is when you give that estimate, that income number will determine if and how much of a premium tax credit you get. That tax credit is advanced right from the beginning of the year, and you’ll get that all throughout the entire year.

Patti: Let’s you and I try to gain the system, all right? Let’s gain the system and say, “Why don’t we go ahead and estimate an income of $40,000 so we get this juicy tax credit so that we don’t have to pay as much money for our medical insurance?”

Eric: Patti, I love that you went into it and said it that way because I’m going to quote this right now. For those of you out there, sorry, we’ll get a little technical here but it’s Form 8962. That’s where you file and have this premium tax credit.

This is verbatim from the instruction’s page from the IRS. It says, “Reckless disregard for the facts.” That will disallow you for the premium tax credit.

What happens is you can tell them whatever number you think, but at the end of the year on Form 8962, you are going to reconcile what your estimated income was versus your actual income. That tax credit is either going to be adjusted upwards or it’s going to be reduced.

If you actually made more income than you estimated, the premium tax credit will be reduced, and you’ll owe more or have to pay it back and vice versa. If you actually made less than what you estimated, you will get more of the premium tax credit, and you’ll get a higher refund or less taxes out.

Patti: The one thing we don’t want to have happen is you estimate too low, and all of a sudden, you’re getting a big fat surprise in April of the following year.

Eric: I would say I’m going to put a little plug in here that’s why it’s so important to work with a qualified accounting professional and a good financial advisor.

Patti: Exactly. For those financial advisors who are listening today, this is a wonderful, wonderful benefit that you can provide to your clients. It’s a really big deal. The key here though is let’s talk about how is that modified adjusted gross income calculated because it’s very different than the way you would normally do your taxes.

Eric: Modified adjusted gross income sounds scary, but it’s not as bad as you think.

Patti: Not nearly as bad. Also, when it’s calculated for this purpose, it’s even calculated differently than, for example, how you would calculate how much of your social security is taxed.

The way it works is you figure out your adjusted gross income, which is the number on the bottom of the first page of your 1040, and then you add back three things. Number one, your tax exempt interest. Number two, any foreign income, and number three, the nontaxable portion of social security if you’re even receiving it.

Modified adjusted gross income is we’re basically adding back a few things. For most people, it’s probably going to be tax exempt interest. The most important thing that I want you to get from this part of it is that if you have a rental property and you’re showing losses, you don’t have to add that back in. That comes off of your income like it does for normal tax purposes.

Here’s where the real strategic planning comes. Capital losses also stay in. You can do some interesting things at the end of the year, or even throughout the year, to increase your capital losses to keep that modified adjusted gross income lower.

Eric: It’s so interesting too because we had many phone calls over the past two months before the end of the year. A lot of accountants too were not exactly sure how they arrive at modified adjusted gross. What we’re talking about is literally on…What is it, page six of the instructions, I think it is, for how you figure this out.

What came to light as we went through this is that modified adjusted gross income is not always defined exactly the same way. Again, the Affordable Care Act seems to do it a little bit differently.

We would always recommend that anytime you’re doing this, it’s really important to work with a qualified accounting professional to do these calculations and make sure that you’re doing the things the right way.

Patti: OK, folks, did I warn you or did I warn you? He gets into detail. We’re talking page six of this big booklet, and Eric actually reads every paragraph of all of those forms. It’s important, because again, this is where these opportunities bubble up.

With that in mind, Mr. Detail, let’s go through an example for our listeners just so that they can get a feel for, gee, if I’m a single person, how much income can I still show and still get this premium tax credit?

Eric: There’s really, when you do it, and we’re going to give an example here. We’re in Pennsylvania but you can go on the healthcare.gov website and there’s a calculator on there that will help you estimate and figure out all this stuff.

Patti: Believe it or not, that calculator is actually easier to use even though it was created by the government, a lot easier than most people might think.

Eric: It’s pretty intuitive in going through it, but basically there’s a couple of income tiers that you have to be aware of.
All these tiers are based on the federal poverty limit.

That’s a whole another thing. We’re not going to dive into. If you were a single, one person household with no dependents living in Pennsylvania, if your income is below $16,753, and again that’s modified adjusted gross, you’d be basically in Medicaid territory.

Ideally, in a lot of cases, anything above $16,753, now you’re going to start to get the premium tax credit. The way it works out is if you’re above $16,753 but below $48,560, you’re going to get some amount of premium tax credit. The moment you go over $48,560 of income, there is no premium tax credit, it goes away.

It’s an all or nothing thing, but within that band, there’s a sliding scale. The closer you are to the lower end, the greater the premium credit. The more you get towards the higher end, the less of a credit there is.

Patti: The key here with this is, to keep in mind, it’s based on the number of people in the household. For example, we have a husband and wife who are looking to qualify under the ACA for some of these wonderful credits. For a household of two, that band is wider so that you can show income of $22,800 on the low side all the way up to $65,840.

Just round it off to, say, $22,000 to $66,000. That’s the sweet spot where you can qualify for premium tax credit and maybe even additional subsidies through the cost sharing.

Eric: Those cost sharing subsidies are only if you’re on a silver plan that they come through. When we’re thinking about it, and how about you walk us through an example? The things that we can really control on our end would be things like how the investment portfolio is structured, and so forth.

There’re certain elements you’ve got to be aware of that we’re going to dive into here in a minute.

Patti: Exactly, and as we go into this, we’re focusing on the silver plan because it does seem to be the most popular plan. The nurse in me is going to come out, and I’m going to say to all of you, you got to really make sure that that’s the right healthcare plan for you and your family. You got to really make sure that that’s going to cover the things that you need covered.

For purposes of today, we’re going to take the silver plan, and what we’re looking at is a female aged 60. We’re in Pennsylvania, so if this woman, for example, has a modified adjusted gross income of $18,000, she’s getting a subsidy of $1,244 per month.

As the income increases, let’s say that we go to $45,000 of that MAGI. We’re still looking at a subsidy of $910. That’s a big benefit. We don’t want to lose that through some of the other things that we create in unintended consequence.

Eric: It’s really important, especially as you come to the year end, that there are certain things you can do depending on how your investments are structured and certain decisions you make, to ensure that you’re getting the best benefit of that tax credit. When we think about this, things that we can control as it relates to our client.

There are certain investment decisions that we can control. There’s also certain tax strategies that seem common sense and are widely recommended, but may actually diminish or undermine the credit if you don’t pay close attention.

Patti: Exactly. For example, on the investment decisions, if in the non retirement accounts, we’ve got too much of an emphasis on income producing investments, which by the way, does include your tax exempt interest, because that gets added back. If we’ve got too much of an emphasis on that, that may take away this subsidy.

You got to look out for things like frequent trading, lots of turnover, capital gains. Also, if you’re retired or you’re receiving cash flow from your portfolio, you want to make sure you want to minimize capital gains. Don’t sell those highly appreciated assets, let’s go somewhere else.

Last but not least, something that we were able to do last year and we were able to preserve or create a significant credit for our clients was taking advantage of the unfortunate circumstance we had in the fourth quarter of 2018, with a big, big loss in portfolios.

I say big, 20 percent on the SNP, international markets even more. To take advantage of tax loss harvesting opportunities. Those strategies, again, don’t create too much income, etc., avoid frequent trading. They can really impact or diminish whether you get a credit at all. Eric, why don’t you go into the tax strategies?

Eric: I will, and just as an add on to that last point, because I think it’s so critical, is the tax lost harvesting. Not only did that allow us to basically preserve a credit for so many of our clients by doing tax lost harvesting, but in certain cases, that created a carry forward that then gives us a reserve that we can work with in future periods, say in 2019 and beyond.

It gives a lot more flexibility to the client, which was huge.

Patti: Great point. That is a really important point. That’s a juicy opportunity. Unfortunately, these things happen, but boy, what can we do to make sure we capture that deduction, not only for 2019 but for many years? Again, good news, bad news, for years to come.

Eric: Common tax strategy, so this is actually how we stumbled across this. You learn a lot of things as you go along, but we were looking, in our focus, how can we take advantage of Roth conversions, or maybe accelerating capital gains and get a zero percent tax rate for our clients?

Again, that focus is purely on taxable income, which is after you factor in your standard deduction and anything else.

Patti: It’s important, let’s do a sidebar conversation. Under the new tax law, the people that are 12 percent bracket is actually wider than ever before and we’re finding more people, if we do some planning, can actually land in that 12 percent tax bracket.

If you’re in the 12 percent tax bracket, I got news for you, folks, if you didn’t listen to the other podcast, which I hope you did, on tax planning strategies at year end, if you’re in that 12 percent bracket, guess what? Capital gains are taxed at zero. That is a huge perk.

We were looking at ways of , gee, A, who’s in the 12 percent tax bracket, because we’ve got real awareness of that opportunity. Should we be creating some gains in that calendar year or in years to come so that, gee, we pay no capital gains tax?

As we were looking into this, that subset of clients who were also receiving premium tax credits under the ACA, there was the unintended consequence. If we did that, then they might lose their subsidy.

Eric: That was a real aha moment where we sat there and are giving ourselves a pat on the back thinking we’ve done a great job shifting income from a high period to a period of relatively low marginal tax. It suddenly dawned on us that, “Hey, we are jeopardizing this significant premium tax credit,” that these people who are basically not old enough for Medicare, they’re in the Affordable Care Act.

We’re going to lose because of that activity. That’s what really led to this podcast, this emphasis on really focusing on how can we plan for the Affordable Care Act, making sure we’re doing the best job for our clients.

Patti: The same thing goes for the Roth conversions. Roth conversions, in certain situations, are a great strategy. Just because it may not work, either this or the Capital Gains Strategy, may not be the ideal thing to do right now in that period of life while you’re on the ACA.

Keep in mind that once you go on Medicare at age 65, chances are your tax bracket is going to be about the same. These opportunities are not evaporating. We’re just delaying them. Until you can get on Medicare, you’re going to be in a low tax bracket, then we’ll go back to looking at can we take some capital gains at zero percent or do a Roth conversion?

Eric: You know what? I’m going to steal word that you use all the time, but it’s about optimization. We’re looking at the phases. Here’s another one of your words, the seasons of life. What’s important is in this season, for people that are on the Affordable Care Act, great, you could do a Roth conversion. Maybe save some taxes, but the greater opportunity is preserving the tax credit.

We’re always looking at the season of life. What’s the optimal way to preserve the best benefit that’s out there during that period?

Patti: I’ll take it one step further. You know me. I am very big on running the numbers. When you run the numbers, it’s black and white. It tells you what’s the ideal option.

Again, many of you listening may not have access to the software. Hopefully some of the people listening, our financial planners, you’re running numbers for clients. This is another scenario that you need to consider.

Eric: For those of you listening out there, I’ve worked for Patti for 15 years. I can say 100 percent accurate that we exhaust every possibility we run, every scenario it seems. That’s how these things come to bubble to the surface.

Patti: To the nth degree.

Eric: That’s right.

Patti: That’s why we exist really.

Eric: That’s right.

Patti: All right. Let’s take a look at what are those step by step? What are the real key takeaways from this? Number one, you want to take a look at last year’s tax return. Get a sense of what your modified adjusted gross income would have been and what you’re projecting it out to be.

Again, understand, you may have had that life event where last year’s tax return is just not relevant.

Eric: Absolutely. The next would be is to really find the sweet spot. This is if you were one household or one member of the household, and you’re applying for it under a silver plan, if you’re between $16,753, and I believe it’s $30,350, that’s the sweet spot.

If you’re on a silver plan, that’s where you’re going to get the most generous tax credit. You’re going to get the cost sharing subsidies, which means lower deductibles and minimum out of pocket. That’s the real sweet spot to target if you can.

Patti: Again, sweet spot or the range for married couples would be about $22,000 to $66,000 is the wide range of when you can qualify for something.

Eric: Yeah, great point. Depending on the members of your household, that will increase the range that you have to target.

Patti: The other important thing is you want to consider rebalancing your non-retirement accounts away from income producing investments.

As always, you want to talk to your investment professional, your financial planner, before you do any of this to make sure it’s really appropriate for you because there are other issues such as your total return that you need to earn on your portfolio, your risk tolerance, and any other tax implications in doing so.

Eric: Absolutely. The next step would be, and this is not advocating for passive over active management. As it relates to your non retirement accounts, really look at very tax efficient funds to keep not only the capital gains distributions down, that’s the big one, which is really unpredictable from year to year.

Basically using index funds or active funds that have low internal turnover, that’s going to make sure that you can hopefully control or keep or minimize the capital gains distributions on your taxable accounts.

Patti: If you’re taking cash flow out of your portfolio, you want to use investments that have the smallest unrealized capital gains. We’ll get technical here on you. Prioritize your tax lots by using the last in first out wherever possible. You really want to look at your tax planning strategy so that you maintain these premium tax credits.

Eric: Next, I would say, stop trying to time the market. The critical piece about all this that we found is that you want to preserve flexibility. The more you’re buy and hold, the less activity that you’re taking, more unlikely the more flexibility you’re preserving for year end where you can take tax losses or do other things that can help preserve the credit.

Patti: To your point, Eric, you really want to be proactive with that process. In 2018, we did not wait for the end of the year to take tax losses. We did it after February also. You don’t have to wait till the end of the year to harvest those losses, because they just build on top of each other.

Whenever possible, make sure that you or your advisor is looking at the portfolio for those opportunities.

Eric: Another point is you have to be very careful about, the conventional wisdom of doing Roth conversions are taking capital gains at zero percent, if you’re somebody that’s on the Affordable Care Act, doing these things.

While they may appear to be good, it can be very bad for the tax credit that you’re actually currently receiving. They could really undo a lot of good other tax credit. You’re not going to know that until you file your taxes for that tax year.

Patti: Exactly. The takeaway from this podcast is, again for those of you who are considering getting on the ACA, there are wonderful plans that are out there. No pre existing conditions, limitations, etc. You want to make sure that you’re choosing the plan that’s right for you.

As you do that, also consider how can you structure your income in such a way to optimize those premium tax credits and the cost sharing reductions. Those cost sharing reductions are your deductibles.

When you visit the doctor, how much you have to pay versus how much the government is paying. Whenever possible, these are…it’s not just a deferral. These are complete avoidance of significant costs for medical care. With that in mind, that’s it for today’s show.

Thank you so much for spending some time with us. If you want to learn more about the ACA and how to optimize your income to qualify for more tax credits, just head over to the website at keyfinancialinc.com. You’re welcome to give us a call, schedule a meeting.

We can do some brainstorm on these ideas and any others. Also, be sure you hit the subscribe button. If you liked today’s episode, share it with others. That’s why we exist, is to share this information. Again, as Eric and I both said, we stumbled across this.

A lot of advisors don’t have an Eric firm that’s doing these deep dives, but they can be significant when you’re doing your planning.

Eric: A lot of advisors don’t have a Patti Brennan either.


Patti: Again, thank you so much, Eric.

Eric: Thank you.

Patti: Thank you so much for joining me today. You always lighten it up and add color. Until next time, I’m Patti Brennan. Thank you so much for tuning into the Patti Brennan Show. We’ll see you in the next episode.

Ep10: New Tax Law Changes that Will Benefit YOU when Filing your Corporate Return

About This Episode

Patti strategizes with one of the Philadelphia area top CPAs, Bruce Boylston of Rothman, Boylston LLC. Together they break down nuances in the New Tax Law to share with their listeners how to save money when filing their corporate tax returns. Business owners will appreciate how easily these actionable steps can benefit them both this year and in years to come.


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 honored to have with me today Bruce Boylston. Bruce is a CPA and one of the founding partners of Rothman Boylston, located right here in West Chester. Among the many accolades that Bruce has, he is an adjunct lecturer at the University of Pennsylvania, and also at Drexel.

One of the cool things that Bruce does is, as part of his work with the people at Wharton, he does work for the Lipman Prize, which is a really neat prize that they are involved in. Bruce, why don’t you do a quick overview of what that’s all about?

Bruce Boylston: The Lipman Prize was founded or was created by the Lipman family, Barry Lipman and his wife. What the prize does is it goes out and tries to find socially responsible and socially innovative not for profit organizations. What they do is they review what they’re doing and then they give them if they meet the criterion the prize committee says their worthy of it then they get the prize.

Our position is simply to look at the financial information of the candidates that are being presented. We then break that down for the committee as well as for the fellows that are part of the Lipman Prize and give them the financial tools that they can use to make certain decisions.

Patti: What a privilege that is. Among all of the firms that we have here locally in Philadelphia, they chose to work with you. That just really shows the quality of the work that you guys do.

Bruce: It certainly is an honor. It’s impressive because there are days…One of them was about two Mondays ago. We’re sitting on top of Huntsman Hall, which is the building for Wharton now, used to be Steinberg, now it’s Huntsman Hall.

You all of a sudden you go, “Wow. Look at where I’m sitting.” It’s a little humbling when it all gets said and done. The Lipman Prize does great work because it gives money to the people that truly can use it and really can be innovative in what they do. Good people.

Patti: That’s terrific. Thank you so much, and thank you for your work in that.

Today, we’re going to be talking about the new tax law as it relates to businesses. One of the things that you and I have been able to work on together over the 20 years that we’ve known each other is really helping our businesses, the businesses that we work with, structure themselves and to optimize the tax laws as they present themselves and change throughout the years.

We’ve got this brand new massive tax legislation that does have important implications as it relates to business owners. Let’s talk about some of the highlights that you see as a result of the law. Let’s really zone in on some of the opportunities that the law could also present.

Bruce: We’ll take the Mac review for a minute. What’s the stuff that grabs the headlines? What was grabbing the headlines was the reduction of the corporate tax rate from 35 percent to 21. That was everybody’s focus. If you remember about a year ago, all these corporations started handing out 1,000 dollar bonuses to say look, we’re giving the money back to the employees, and so on.

I won’t comment on that, but I will tell you that there’s a significant saving that’s taking place at the corporate level. In addition to that, they can also then bring their earnings from overseas back into the United States at another reduced rate.

That is giving the corporations’ the ability to have more cash flow, which I’m sure is driving the market to an extent and all that you folks deal with the politics of who’s going to get the money at the end of the day and so forth.

From that perspective at the C corporation level…C corporation means that’s a corporation that has shareholders but the income does not flow to the shareholders. It stays in the corporation, gets taxed in the corporation. What gets taxed to the shareholders in a C corporation is dividends.

As an example, Costco is a C corporation. I was just looking at their books, and it looks like they’re going to save probably $300 million in taxes in 2018 based on the new tax law.

Patti: That’s a big deal.

Bruce: It’s a significant deal. Therefore, put that [inaudible 4:18]. The question becomes what are the companies going to do with it, and that’s a political question. From a practical standpoint, corporations will have more cash because of the change in the tax law.

Patti: I just hoped that when I go to the cash register, the cost of my food is going to be lower.

Bruce: Well, that’s OK. [laughs]

Patti: So, I’m dreaming?

Bruce: Exactly. [laughs]

Patti: That’s interesting. One of the other things that I thought was also pretty big deal is the repeal of AMT, alternative minimum tax, for corporations. That’s also pretty significant, isn’t it?

Bruce: It is pretty significant, but again that operates at a level that certainly my firm doesn’t operate in. That’s more in the public traded companies. C corp level was never really a big issue at our level. But certainly again, it’s another benefit to large corporations that they’re going to be paying less tax.

That was the whole thrust of the law. We need to become more competitive at a global level. We had the highest corporate tax rate in the industrialized world. They certainly have made some adjustments for that.

Patti: I thought it’s also interesting you may had mentioned earlier when we were talking about the changes in the accounting methodology that is now available again for companies.

Bruce: Let’s take it down a step and get out of the publicly traded companies and come down to the privately held companies, probably more people that are your kind of client base or our kind of client base. One of the things that we always struggle, and I love talking about this in class, is what’s the difference between accrual and cash?

The accrual method says you recognize income when earned and expenses when incurred. A negative side of the accrual method of accounting is you have to recognize income before you actually get the cash. In a small business, that may not work well.

Congress has always been fooling around with this and we’ve all been jerking around this. Now it’s $25 million. You can use the cash method but you have to be in certain industries. It’s an overreaching if you’re under $25 million of gross receipts. You don’t have to do anything, you can use cash.

You’re still going to have to use certain methods. You may still end up having to use the accrual method, but it certainly expanded the opportunity for some companies to change to the cash method that may be possibly be using the accrual method at this point.

Patti: From your perspective and from my perspective for the businesses, it’s really a cash flow management issue. Is that correct?

Bruce: Absolutely.

Patti: It’s not a tax issue, it’s just how do you manage the business and make sure that you have the money for payroll and other expenses without having to allocate money for the taxes on money that you’ve really didn’t get yet.

Bruce: Right. Potentially maybe you don’t get paid on that receivable. Now I’ve paid tax and I’ve got to wait till next year to claim it as a bad debt. In the world of taxes, we all like to be on the cash basis.

Individuals by nature, 99 and nine tenths percent are cash basis anyway, but clearly, at the corporate level and at the partnership level, business level let’s say, it’s clearly an opportunity that’s going to present itself in more and more cases. Good thing.

Patti: I also thought it was really interesting how they expanded the use of the bonus depreciation, the ability to do 100 percent expensing, etc. Why don’t you talk a little bit about that as well?

Bruce: There’s a perfect example of where it’s a wide open playing field now. If you buy something, you can write it off within one year. Let me give you a caveat on that that may take a little of the excitement away.

I go out and I borrow let’s say half a million dollars to go buy a half a million dollars’ worth of equipment. It’s great. I get a half million dollar deduction and if you think about it, I borrowed the money. I didn’t put any cash out. In 2019, the year I did that, it’s a home run but what happens is you’ve got to pay it off.

Now you’ve got to generate income in the subsequent years to pay off the loan, but the deduction sits back in the year that’s closed. You can somehow come up with some timing differences. You have to be careful how you do that.

Patti: This is a perfect example of what I so appreciate about the way that you think, Bruce, because you’re not just looking at it from a tax perspective. You’re looking at it from a business planning perspective with the understanding that we have got to pay this thing back. What’s going to make the most sense for you as the business owner, etc.?

Here’s a question. I don’t know the answer. Can a business choose not to do 100 percent expense?

Bruce: Yes.

Patti: Let’s say that same example. You borrow the $500,000. Can the business say hey, I’m just going to deduct it over a period of five years?

Bruce: There’s an election you can make to get out of bonus depreciation, but usually the motivation to go do what we just talked about is because the company has profit and the company wants to get rid of that profit. Therefore, they will use after they’ve funded their pension plan, they’ve give employees their bonuses and so on, they’ll go buy equipment.

I have concept here in the United States that we’re the only country where we’ll spend two dollars to save one dollar in tax. Sometimes it’s better just to pay the tax. Therefore, in cases like this, maybe the half a million dollars of depreciation isn’t really worth it when you’re really…Do you really need the machine?

Patti: That’s exactly right. There is a practical aspect of all of this. Don’t let the tax tail wag the dog.

I’ve got to tell you, Bruce, you and I do this all the time. That is a statement I must tell people at least three times a week. Let’s make sure that we have our ladders on the right wall.

Bruce: Absolutely.

Patti: We talked a little bit about C corporations. Then we’ve got this whole world of other types of entities S corporations, LLCs, etc. Let’s talk a little bit about that and some of the reasons why you might choose one over the other, especially as it relates to Pennsylvania State tax.

Bruce: The one thing with Pennsylvania State tax, I don’t know if I said this before, but if you’re looking at a lower marginal rate for corporations at 21 percent…Excuse me, not a marginal rate. It’s a flat rate at 21 percent. Pennsylvania’s corporate tax rate is 9.9 percent. So, it’s 31 percent. Is the bargain really sitting there in the C corp? Not so sure.

Then we take the next option, which is to say let’s go to what we call pass through entity. The pass through entity is an S corporation. It’s a corporation, you get all the legal protection, but the income passes out to you as the shareholder.

Then we can go one step further and we use an LSA. Go ahead.

Patti: Let me stop you right there. Let’s give people an understanding of what that really means to them. When it passes through you as the shareholder, you’re taxed personally instead of into the company. Therefore, you pay taxes theoretically one time. We’ll get into that in a minute. The most important concept is it flows through to your personal tax return.

Bruce: It flows through your personal tax return, so you’ve escaped the corporate level tax. It mixes up with the rest of your income and potentially there’s some savings there. We like pass through entities because it lets us manage the tax liability sometimes as best we can.

You have the S corporation. Then you have the LLC, which is Limited Liability Company. The limited liability company can elect to be an S corporation if it wants to, but its default it will be treated as a partnership if there’s more than one owner or it will be considered a Schedule C or sole proprietorship if there’s only one owner.

It gives us a flexibility of moving income around within the corporate structure to the parties potentially. If we use an LLC as a partnership, we can maximize depreciation and so on. In my perfect world, we like an LLC as a partnership versus sole proprietorship. However, that all came to an end in 2018 with the invention of Code Section 199A.

Patti: That’s interesting. Tell us more about 199A.

Bruce: 199A is the one when Congress is putting this together, the issue was we’re going to give these corporations a 21 percent tax rate. Everybody raised, what about the S corporation? Why does the C corporation get the benefit, not the S corporation?

Congress came up with 199A which says, at the very macro level, that a business will only pay tax on 80 percent of its net income that flows through to the shareholders. That sounds like a great deal. I get a 20 percent deduction of net income.

But, like all things good in Congress, there’s always a but and maybe and a comma after everything that goes on. 199A has several restrictions that are difficult to deal with sometimes. One of them is the fact that if you are, say you’re filing a married joint return, the 199A deduction begins to phase out between taxable income of 315 to 415.

One of the things that you’ll have to watch out for is, once your income goes above…Taxable income. I have to keep emphasizing that because it’s taxable income. Goes above $315,000 if you’re filing a married joint return and you are an SSTB my suggestion is…I can’t remember what all the acronyms are, so look it up.

An SSTB is basically a doctor, a lawyer, accountant, potentially an investment advisor. These are all companies, professional companies is really what they’re looking for. They’re saying once you get above 315 and then at 415, forget it. You’re not going to get the 20 percent at all. It phases out.

The interesting thing in all of that surprisingly is architects and engineers were not included in the profession.

Patti: That’s an interesting carve out. What about real estate professionals? Didn’t they get a break on that as well?

Bruce: They got an interesting break. This was, I believe, don’t quote me on this, but I believe it was Senator Corker from Tennessee that sat there and held his breath and said look, unless you put something in for rental properties, the way the law was written, they weren’t going to get any benefits.

Rental properties got thrown in because what’s usual with most rental properties? They don’t have salaries. Once you get above that 315 mark, all of a sudden we have to start using salaries as a fraction of something. It goes away.

If you have a real estate company, you can use two and a half percent of the unadjusted basis of the property. Let’s say you have a building for $100,000 and its land is 50, you can’t use the land but you can take two and a half percent of the building cost. It’s not the depreciable value. It’s the actual cost of the building.

There’s all sorts of other caveats that go with this, but that becomes the basis for your 20 percent deduction. Not that you’ll get 20 percent. You may only end up with two and a half percent of the basis. It was something that was thrown in there to give real estate people a benefit.

Maybe I should explain how tax law is structured. Congress passes a law, then they empower the Internal Revenue Service to write regulations. The regulations just came out for this 199A cap as it relates specifically to this issue with regard to real estate.

The regulation now says that for you to qualify as a real estate company that can take advantage of this 199A, you have to show 250 hours of services. They don’t have to be services from the owner standpoint.

It can be the person that cuts your grass, the person that paints the house, whatever. If you can combine all those and they said there’s at least 250 hours being spent on this property, then you can get the 199A deduction.

Patti: It’s so interesting because I will tell you, I was out at the National Conference for the AICPA. I’m a member of it just because that I think your industry is phenomenal as it relates to helping us talk about tax planning.

This time last year was all the rage. Gee, is there a way that we can create real estate entities for those people who would otherwise not be able to take advantage of that 20 percent tax deduction? It’s so interesting that it took like a year for them to come out and say before you do that, here’s what you need to do in order to actually be able to qualify.

Bruce: Taking the IRS for what they are, the other issue is they’ve now said for 2018, as long as you can demonstrate somehow that you’ve got the 250 hours, we’ll let you go. Going forward, you have to keep contemporaneous records. That means that you have to write down that on March 4th, John Smith came to our place and shoveled snow for an hour and a half.

Again, that’s what the regulations say, that’s what we have to do and that’s what we have to abide by. It is going to become somewhat onerous for the real estate people that maybe only have one or two properties to have to keep track of all this stuff.

Patti: Let’s talk about some of the deductions that were retained and some of the deductions that were eliminated. We can do some brainstorming also about what do you think Congress was thinking when they actually passed this? For example, we can talk about the entertainment deduction.

Bruce: The other thing you have to look at when a bill goes through Congress is what they call scored. It’s scored for its revenue gain or its revenue loss. Through the scoring process, what you end up with is them having to take away some things to offset some revenue losses on the other side.

Entertainment was one that came off the table. Therefore, no entertainment. Although entertainment by itself was somewhat limited anyway, but now entertainment in no way, shape or form is deductible.

One of the other things and this goes to the individual level, is the fact that, let’s say a transit pass. It’s still tax free for the employee but no longer deductible for the employer. What’s that all about? Again, we’re trying to score the bill.

Same thing with home equity interest. Trying to score the bill. Where can we take? We’re going to take it from here and hopefully, nobody will complain. Salt is another perfect example of that.

Patti: It’s just so interesting. The bottom line to this for businesses is it basically means you can deduct the cost of the hot dog but you can’t deduct the ball game tickets?

Bruce: Correct.

Patti: It does have interesting implications. You think about the concept of the transit pass that you’re using as an example. Employers and employees like that perk. That’s a really important perk. Does the employer now, because they can’t deduct it, do they take away that perk? What does that do to morale? What does that do to the ability to retain the talent?

Again, getting back to something we talked about earlier, you want to look at these things and make good sound business decisions irrespective of the tax implications. You’ve got to keep good people. That’s one of the ways that you can do that.

Bruce: Absolutely. If there’s one complaint that clients have over and over and over again at the business level is we’ll accept whatever the law says, but hey, can you give me a break and keep it consistent.

If you think about it, we do probably within every three to four years, we’re changing something else. Something that was deductible is no longer deductible. That piece of equipment is now only deductible 50 percent, not 100 percent. To run a business, you need to know what’s coming down the pike, and tax laws don’t give you that option.

Patti: On a bigger level, we’re not going to talk about it right now, but think about that on a global basis and the impact of these potential tariffs. You’re running the company in Apple and there’s a possibility of a new law that will completely change the operations of your business.

Same thing on our level with small businesses, you come out with a wonderful employee benefit for your employees, it works from a cash flow basis. The employees love it. They love working for you. Then all of a sudden it’s taken away. Now you have to make a different, maybe a new business decision. It’s one thing to give something to people. It’s another thing to take it away.

Bruce: That’s what a lot of our clients are trying to decide. Is this something we really want to take away? We’ll forego the deduction. From the employee’s standpoint, it’s still tax free. There’s really no harm, no foul there. Again, it starts to create other issues in the corporate level that they have to think about.

Patti: Another thing as it relates…We’ll talk about this in the next podcast as it relates to planning from an individual perspective. Those employees who have miscellaneous expenses related to their job are no longer going to be able to deduct them. It’s an interesting dilemma for salespeople who buy trinkets to give to their customers. That creates a little bit of an issue too.

Bruce: Sure. Again, there’s caveats to everything. There’s no such thing as an absolute statement that I can make. Under the new law, the home office deduction is gone if you’re an employee. If you’re not an employee, it still exists for sole proprietors and things like that.

The other thing that I have to tell your audience too is the fact that although it’s gone for federal purposes if you meet the criteria, it’s still there for Pennsylvania and local. Just because you can’t take it doesn’t mean you shouldn’t look at it because it can work on your state and your local return as well.

Patti: That’s a really good point. That is a really, really good point. We’re talking about the federal law, but there are state income tax implications as well.

You talked about the home office deduction. This is something that I talk with people all about. I’d like to hear your thoughts about the home office deduction, whether people should be really worried about an audit if they take a home office deduction.

Bruce: No, not at all. In fact, actually, the IRS made it easier. They came up with what they call the simplified method. Let’s say your office is 100 square feet. I believe it’s five dollars per foot. Your home office deduction is $500 and we’re finished.

The IRS doesn’t look a this because, again, as an employee’s perspective, home office was difficult to get because the business expenses had to exceed two percent of adjusted gross income. Very hard to get.

At the Schedule C level, it’s easier to get because there is no limitation, but it’s just not a big number. Everybody should also remember it’s not just your office. If we’re using your house for storage, things like that, make sure you include that square footage as well.

Patti: Great point. Thank you so much. That’s a great, great point.

Let’s go back to the corporations. One thing that has changed relates to this concept that I know you’ve done it for our mutual clients, and that’s related to net operating losses. We can no longer carry them backwards in order to get the tax benefits. You can still carry them forward, but you can’t get the backward benefit that we used to be able to get.

Bruce: The carryback period, if memory serves, was two years. I would have to say, in most cases that never came up. I think we maybe do two or three carrybacks a year. The fact that you’ve lost the carryback, I don’t think is super critical.

However, you do have the carryforward going forward, which comes in handy. The mutual client we were talking about before with regard to real estate losses. We’ve been able to carry those losses forward. This is the year they have income. Now they have income but they don’t have to pay any tax. The carryforward of those losses are helpful. There’s no doubt.

Patti: Isn’t that a beautiful thing?

Bruce: It is when it works.

Patti: Having income and you don’t have to pay taxes on it. It sounds like an incredible deal.

Bruce: Yeah, but here we go back to the same issue. You had to spend money to lose it. At the end of the day, if you can break even, we’ll call it square. Again, it serves itself well in the year that you can actually use it because it’s somewhat of a relief rather than just continuing to dig a deeper hole.

Patti: Let’s talk strategically now. We’ve got this new tax law. You might have someone who is above that $415,000 limit, not able to take the 20 percent deduction. What do you think, from a practical perspective? When do you think, if at all, would it make sense for those people to think about changing the entity and going to the C corporation where they get that 21 percent rate?

Bruce: That, I’m going to say is probably a hard push. I haven’t seen anything in our analysis yet, but what we have done, I think we’ve done four or five this year if memory serves, is we’ve taken people that are in partnerships, specifically LLCs that are taxed as partnerships, and converted them to S corporations.

The short end of that story is once you get above 315, the formula changes with respect to the 20 percent and you have to start using 50 percent of the wages as one of your measurement points. If you’re a sole proprietor or you’re a partner with not a whole lot of payroll, you’re going to lose that deduction.

If we create an S corporation and we take some of which you’re taking out and call it compensation, which we have to in an S corp, now we’ve brought up the 199A deduction back up to where it has some benefit. It’s one of those things that’s a case by case basis, but that’s one of the conversion points we’ve been looking at, which is to say go from the partnership, sole proprietor to an S corp.

Patti: Bruce, it really is a good example of, especially during tax season when you’re sitting down with your CPA, with you, really these conversations have to come up and early in the year so that you’re able to take advantage of it.

Bruce: The conversion is a perfect point. Again, and this is not to toot our own horn, but we’re always in contact with our clients because it’s not a static issue with respect to tax planning. It’s constant throughout the year. If [indecipherable 26:17] comes to us as a partnership and they say, it’d really be great if you were a partnership, well the door is closed for 2018. It becomes a looking forward issue.

People have to be proactive if they’re not hearing from their firm. They have to be proactive and say am I in a situation where I could take benefits that I’m not looking at right now.

Patti: That goes with all aspects of this planning. Basically, we talked about the carryback. We talked about the income threshold. The ability to convert from different entities, etc. Here’s a question. I know the answer, but just for our listeners.

Let’s say that you’re located in Pennsylvania. If it doesn’t work because of the 9.9 state income tax, would it ever make sense for a business to move to, for example, Delaware and incorporate in Delaware? Does moving the business entity to a different state that might have a lower tax bracket, does that make it look more favorable in your eyes?

Bruce: Possibly, but I’m going to have to cite the recent Supreme Court ruling with Wayfair. I think it was Justice Kennedy said guess what, this whole nexus nexus is physical location it’s not working in today’s world. Therefore, we’re not going to be so much concerned about where you’re physically located, we’re going to be more concerned about where your company is actually doing business.

Let’s take the State of California as an example. If you have $500,000 or more of sales to people in California, you are subject to California income tax. They just came out with a recent ruling that said if you have sales of over $100,000, you have to start collecting sales tax for us.

If you think about California, which I believe is the fifth or sixth largest economy in the world. Everybody’s doing business in California. You’d say, OK, that kind of makes sense but we live in a world where we have 50 states. None of them do things exactly the same.

We had a situation last year where we had a client who tripped the half a million dollar rule for California. So I called Pennsylvania and I said, excuse us but what are we going to do? We’re not going to pay tax in two states. Pennsylvania’s attitude was, well, our provisions don’t work that way. Tough, you’re going to have to deal with it.

These are the things that we have to watch out. It’s just not as easy as moving to another state because you can still get trapped pulling that income right back to where you were.

Patti: Very interesting, Bruce. Really good points. Let’s summarize this in terms of takeaway for our listeners. What I’m hearing from you, and I’m going to paraphrase it, and fill in as you wish. Takeaway number one is look at your business structure. Make sure that you’re talking with your CPA early in the year as it relates to should you be a C corporation, LLC, Sub S LLC, etc.

Bruce: Correct. Status quo is no longer acceptable.

Patti: Boy, that is the takeaway. The status quo is never really acceptable because things change so much.

Number two, understand the deductions that were enhanced, for example, the depreciation deduction, things of that nature.

Also, understand that there are some deductions that have been taken away. Very important to know going into this year what you can and cannot do.

The third one, most important, is don’t let the tax tail wag the dog. As it relates to running your company, run your company from a practical perspective doing the right thing for your employees and the customers that you serve. If we all do that in what we do for the people that we serve, you’re going to win no matter what.

Bruce: That’s true. The tax you have to look at as it’s a cost of doing business. It’s probably the worst cost that anybody wants to deal with, but it is the cost of doing business. Therefore, you have to keep it in control from the standpoint that you’re not going to try to eliminate it at the expense of something else.

Patti: Exactly.

Bruce: That’s what you need to do.

Patti: Excellent. Bruce, thank you so much for joining me today.

Bruce: My pleasure.

Patti: This was terrific. I think our listeners got so much out of this today. That’s it for today’s show. Thank you so much for spending time with us. If you want to learn more about business tax planning, just head over to our website at keyfinancialinc.com, where you can schedule a call with me. I can introduce you to Bruce. You can learn more about what you can do for your business.

Also, make sure you hit the subscribe button if you like today’s episode. Be sure to turn on notifications so you don’t miss a single episode.

Bruce is going to be joining me again. He’s going to be talking with us about the individual tax benefits. You really want to hear that because there’s a lot of juicy stuff in that show, as well. Please leave us your comments on the show. Tell us what you liked or didn’t like. We would just love to hear from you.

Until next time, I’m Patti Brennan. I will see you in the next episode. Thanks so much for joining us.

Ep9: Ready to file your individual return? Consider these money-making tips first regarding the New Tax Law!

About This Episode

Patti sits down with one of the top CPAs in the county, Bruce Boylston, to discuss key tax planning strategies designed to save their clients’ money when filing their individual returns. Patti and Bruce break down the complexities of the New Tax Law into easily comprehensible tips and strategies – just in time for the filing deadline! You do NOT want to miss this episode!


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.

With me today is Bruce Boylston. Bruce is a CPA and one of the founding partners of the firm of Rothman Boylston here in Westchester. Bruce is an incredible resource for us.

Whenever we have a complicated situation, or even a simple situation, he’s my go to person to really drill down and look at the nitty gritty detail. It is not unusual. Bruce, I’m going to be getting you into trouble, I think.

Bruce Boylston: OK.

Patti: It is not unusual for you and I to be spending a Sunday on the phone together going through mutual clients to look at opportunities for those people. I think that that says a lot about you and how important your clients are to you.

Bruce: Most definitely. One of the things that I always say about a professional is a professional is usually more concerned about being right than making money. That carries through with being there on Sundays.

Patti: Absolutely, absolutely. I think one of the other notable things about your background is that you are an adjunct lecturer at University of Pennsylvania school. It’s an incredible honor to be that person and to be one of those people chosen.

You also assist with the Littman prize, which is a program under the auspices of Wharton that helps non profits. Again, they could go to any firm in the Philadelphia area, and they have chosen you to help them ascertain which of the non profits are so deserving of the prize that’s being given each year.

Bruce: No doubt. Especially, I tend to take Penn for granted sometimes. In fact, let me tell you a great story. I’m walking down Locust Walk, which is the center of Penn. I guess it was about two weeks ago.

A former student comes running up to me. He says, “Guess what?” Before I tell you that story, let me give you some background. This gentleman came to us from Ethiopia. I forgot on what scholarship he was, but anyway, he declared in the first class that he was a socialist.

That’s great. We have opposing points of view sometimes. The next thing you know, three, four weeks later, he comes up to me very quietly and says, “I’ve got a story. You can’t tell anybody else.” I said, “What’s that?” He said, “I just got a summer internship at Goldman Sachs.”

I said, “Ah, going to the dark side, I see? OK, good.” With all that said, now we roll forward a year from now. Here he is on Locust Walk. He says, “I have something to tell you.” I said, “What’s that?” He said, “I just was awarded a Rhodes Scholarship.” He’s going to be a Rhodes Scholar.

That’s when sometimes you have to step back and go, “Wow. This is where I am.” Pretty impressive that you’re dealing with Rhodes scholars.

Patti: That is amazing. The fact that you were an influencer in his life says a lot about you, Bruce.

Bruce: It also says something about Goldman Sachs because they turned him over to the dark side.

Patti: Absolutely. Today, we’re going to be focusing on the new tax law as it relates to individual tax benefits. There’s so much to this new law. Today, let’s focus on each one of us on a personal level. Maybe we can just start out with how it was structured, especially as it relates to, let’s just take the standard deduction.

Bruce: Let me frame the new tax law first. There are some things that we’ve all heard in the press that this is a significant change, and it is. But there’s a lot of changes, and they’re just not all super big huge changes. It’s little nuances, twist here, twist there. But the big one that got changed was the standard deduction.

In the past, as an example of the standard deduction, was relatively low. Maybe about 12, 14 thousand dollars for a married couple. Now, it’s $24,000. Plus, if you’re over 65 or blind, you get another $1,300 per person. Potentially, you could be as high as somewhere in the 26, 27 thousand dollars for a standard deduction.

You take that, and then you push it up against the fact that they’ve taken away some itemized deductions, and all of a sudden there is this issue that, OK, the standard deduction may be the way to go for a lot of clients now, even clients with significant income.

Patti: It’s really interesting, Bruce. We’re running numbers. We do tax projections for all of our clients, and it is fascinating to me because of what was taken away. For example, the new limitations on medical deductions.

This year, it’s going to go to 10 percent of adjusted gross income. Therefore, a lot of people aren’t going to be able to take deductions for their medical expenses. The limitation on state and local taxes. The complete removal of miscellaneous deductions. There are a lot of things that fell in that category.

Bruce: Yeah. Especially if you look at the state and local taxes, because you think of that and you say, “OK, my income taxes are going to be limited to $10,000.” But that’s not true because you have to throw your real estate taxes in.

Take somebody who’s retired but owns two homes. Real estate taxes could be 20, 30 thousand dollars. In that case, that’s all now gone, because it’s going to get capped at 10. The other thing that disappeared was the home equity loan interest. That used to be, if it was up to $100,000, you could still deduct the interest no matter what you use the money for.

I want people to remember one thing, it’s not gone, because what you have is if you’ve used that home equity loan to either acquire the property or make improvements to the property, it’s still deductible interest.

Now let’s put something on top of that. Under the new law, the most you can borrow and deduct interest on is $750,000. Mindful that’s both homes. You can’t say it’s on a per home basis. If you’re over that 750 mark, you don’t have to worry about it as long as the mortgage rolls and plays part of the enactment of the law, somewhere in December, if I remember, of 2017.

What I don’t want people to do is say, “Well, home equity loan’s no longer deductible.” No, it could be deductible if you can do tracing and go back and see where the money was spent.

Patti: The $750,000 limitation also includes the home equity loan.

Bruce: Correct.

Patti: It’s a total of the loans against all of your real estate.

Bruce: You could see where Congress is trying to basically pull back the subsidy on the acquisition and ownership of a house. Right, wrong, or indifferent, that’s clearly what they’re trying to do.

Patti: As a result, more people are going to be taking the standard deduction and not itemizing at all.

Bruce: Correct.

Patti: That’s an important distinction. Another important thing that we need to point out is we are no longer getting the benefit of our personal exemptions, which for a couple, two kids, it was $4,000 about per person. That was a $16,000 deduction a family of four used to get. We’re not getting that anymore.

Bruce: We’re not getting it, but then again the other thing you have to look at, and the same thing with the itemized deductions, is they used to phase out based on income. Depending upon what your income level is, you potentially weren’t getting those deductions anyway. They have been lost for a lot of people, but not lost for all. They might have lost them years before.

Patti: The other important point to keep in mind is the impact of alternative minimum tax in prior years. A lot of times, people would have those deductions, get the income down, but then they got smacked with alternative minimum tax.

Bruce: Exactly. Tax has been one of them. Tax is what we call the preference item. When we calculated your alternative minimum tax, we couldn’t take a deduction for taxes paid. People are going to say, “I’ve lost a deduction because of salt,” but potentially you didn’t lose anything because now you’re not subject to the AMT on that preference item.

Again, there’s no quick easy answer to tell what the impact is going to be of this new tax law because there are so many pieces that move back and forth.

Patti: Exactly. It’s also important for everybody to understand as they do their taxes this year, to also understand that the withholding was changed as of January to accommodate the new law. You might go and get your taxes done, if you do it yourself, etc., and finding you actually aren’t getting that big fat refund that you were hoping for. That in fact, you owe, simply because not enough was withheld.

Bruce: They changed the tables but they didn’t…I think they asked, but nobody did probably, redo your W4. Your W4 also had to be redo, because let’s say you had a lot of state and local taxes. Let’s say you had a lot of miscellaneous itemized deductions. These no longer exist. There was no way to simply adjust the tables and say everything is going to work out correctly.

I can guarantee you there’s a lot of people that are going to come up short this year. My suggestion is, which you should do now if you haven’t done it yet, is rerun your W4. Make sure you get your withholding correct, because if not, you’re going to be repeating your problem.

I’ve been reading that the IRS is going to go easy on penalties. There are also other ways to get penalties abated. Even if you do get hit with a penalty, there are several ways to get them abated. However, one of the things that the IRS won’t abate is if it’s a habitual issue. If you get out of the penalties this year, it doesn’t mean you’re going to get out of the penalties next year.

Patti: Excellent point. Let’s talk about what the tax law actually gave in terms of young families, in terms of the child tax credit, which is a big deal.

Bruce: Yeah. That credit went from $1,000 to $2,000 per child.

Patti: Doubled it.

Bruce: Yeah, but remember everything is tied to phase outs. Just because you have two kids, it doesn’t mean you’re going to get the credit. It’s one of those things you have to base on the facts of your return itself.

Patti: Exactly. Speaking of kids, I think the expansion of the 529 plan is another important element of the new law as it relates to now you can use 529 plan for secondary education, up to $10,000.

Bruce: Yes.

Patti: It does warrant some thinking, some planning, because if you use the 529 plan for high school, for example, that means that there’s less available for college. That may or may not be a bad thing as it relates to if you’re trying to qualify for financial aid.

All of these things have implications. It’s important, under this new law, that you take advantage of some of the things, the doors that have been opened that didn’t exist before.

Bruce: No doubt about that, but again in the context of what’s going to be the ultimate outcome. You talk about taking $10,000 out for high school education. That’s great, but now you’ve taken $10,000 out of the person’s college fund.

You spend all this money to send them to very expensive high schools, and what’s the outcome? They go to very expensive colleges. From that perspective, you want to keep your eye on that 529 plan.

Remember, one of the small little benefits you get out of the Commonwealth of Pennsylvania is you do get a deduction for your 529 contributions up to $15,000 per person per year. Although you’re not going to get wealthy off of that deduction, it’s worth continuing to fund 529s for a lot of reasons, that being one of them.

Patti: Absolutely. The other part of that is that you can do five years’ worth of contributions and it’s not subject to a gift tax. However, the Pennsylvania income tax deduction is still limited to that $15,000 per person.

Bruce: Correct. It doesn’t carry forward either. It’s 15 and lost. But if I can put $75,000 into a 529 plan, a regular tax free for five years, I gladly would give up the 3.07 percent tax break.

Patti: Very good perspective.

Bruce: No doubt.

Patti: Very, very interesting perspective. This is what I love about, because you just get to the bottom line and say, OK, here’s a decision point, here’s what…

Bruce: Yeah. That’s what a lot of tax decisions are about.

Patti: Exactly. What are some of the other things that you think our listeners can really look at in terms of strategic thinking, strategic planning as it relates to their taxes?

For example, we’ve got many people, many clients who are 70 and a half and have to take required minimum distributions. This is something that I know you and I are both really pounding the pavement and sharing with our clients to say, hey, there’s a really good opportunity here to continue to fund things that are important to you and still get the tax deduction even though you’re not itemizing.

Bruce: Let me put that in context so people understand. There’s an opportunity that exists with regard to using your RMD, your required minimum distribution, as a way of actually getting a deduction for charitable contributions that you may not get.

The issue here is, let’s take an example, you have a couple that’s both 72 years old. The standard deduction is 26, 27 thousand dollars. Their only real deductions at this point are taxes. Let’s say they have real estate taxes, but it’s kept at $10,000, so it doesn’t make a difference. Let’s say they also give away $10,000 a year.

So, they have a $20,000 itemized deductions, but they’re going to take the standard deduction at 26. They’ve lost the tax benefit of that deduction as far as contributions are concerned. However, if they were to pay those contributions out of their RMD, they’re going to reduce the amount of income that’s reported and they’ll still get the 26, 27 thousand dollars standard deduction.

You’ve effectively gotten the benefit of the charitable contributions because you’ve reduced your taxable income, because you don’t report all of the RMD, because you gave to charity, but you still get the standard. Effectively, you’re still getting the effect of the deduction.

My point to you or my question to you is, “What should clients do?” Let’s say they want to make contributions of $500 or whatever, is there a mechanism that is set up so that they can do that, or does the broker say no, it’s got to be a minimum of $1,000 or whatever?

Patti: I can tell you that from our perspective, there is no minimum. We just get a list of the charities that people want to contribute to, the addresses, we put it on a form, and we send the money directly from the IRA to those charities of choice. It’s an administrative thing that we take care of for our clients.

For those people who manage their finances themselves, it is just really important that you go to the custodian for your IRAs and make sure that they have the proper paperwork and that they’re able to send it directly from your IRA to the charity. If you take receipt of that money, it is then considered taxable income, and you’re not going to get the benefit that Bruce is referring to.

It’s really important that this is done correctly, dots some Is, cross some Ts. But boy, what a home run that is for people who want to continue to contribute to charities.

Bruce: Yeah, and they get a tax benefit. Again, the issue there is the fact if the mechanism can be made fairly easy, because everybody said, oh jeez, how am I going to do this? There’s confusion that reigns. I have got to believe that it’s going to get up, it’s going to be fairly easy. It’s almost like a no brainer that’s the way you should do it.

Patti: It is absolutely no brainer. From my perspective, I don’t care what kind of work is involved. It’s the right thing to do.

Bruce: It’s perfect.

Patti: The other kind of domino effect to this is also that it reduces a person’s adjusted gross income. You go back to those Schedule A deductions, because the medical expense deduction is tied into adjusted gross income and we are lowering the adjusted gross income, you may be able to take more of your medical expenses as a deduction.

Because you’ve lowered it because of the generosity that you had to the charities that you want to contribute to. As with all of these things, there can be a domino effect that can create a benefit for you. It’s just important to talk to your CPA, your financial advisor, to see how you can optimize it.

Bruce: I’ll give you one other benefit that comes into play, and I don’t know what the terminology is, but when your income gets above a certain level, your Medicare premiums go up. This is a way to bring that income down.

Patti: Oh boy, Bruce, that is a very good point.

Bruce: There is a planning opportunity for people that they can use, especially if they’re on the bubble with respect to that increase in Medicare tax, maybe do their contributions this way and potentially reduce it accordingly.

Again, what I would say is, and this is the important part about it, these are all things that have to be done during the year. If you come to us on April the 10th…

Patti: You’ve closed the barn door after the horses got out. It’s too late.

Bruce: Planning is critical in this. Again, none of these are home runs. They’re not tens of thousands of dollars in tax savings, but that’s not the game we play anymore. We play at $100, $200, $500, $1,000 at a time.

Patti: You know what, like a baseball game, Bruce, isn’t it true that the team…It’s a bunch of singles. But isn’t it true that the team that hits and just gets people on base, those are the teams that win the game?

Bruce: My opinion is, men on base are what score rounds.

Patti: Here’s another opportunity for those of our clients that retire early, or retire period, or they’re downsize and decide, you know what, I’m done. There’s a unique planning opportunity that may exist.

For example, let’s say that we’ve got somebody and they’re retiring. They’re 62 years of age. Because the sources of income and the way that that is taxed is going to be very different probably, we’ve got a great opportunity for the next seven years to really optimize a person’s financial situation that really has a compounded effect for the rest of their lives.

You and I do this together all the time. I call it the bracket racket. Let’s talk about that a little bit for our listeners.

Bruce: Specifically, are we talking about brackets or do we really want to get into the discussion about Roth IRA conversions?

Patti: It’s a little bit of both. To me, the brackets are because, for example, the 12 percent tax bracket is wider for joint filers and because of the fact that, for example, in a 12 percent tax bracket, you can take capital gains up to a certain limit and pay no tax on those gains. That’s an important planning opportunity.

Anything that we can do during those years where the brackets may be close to that 12 percent or below, we want to understand that we’re there during the tax year, and do some proactive planning where we can take advantage of it.

Bruce: That’s true. Eric and I worked on a couple cases like that where it was like, “OK, where is the threshold of capital gain?” Therefore, in the one situation somewhere around $40,000 with zero tax. It was a unique financial situation where her client’s income had dropped significantly but nonetheless gave planning opportunities to effectively escape all tax on the income.

Patti: That was a situation where that person would have otherwise had to have paid 23.8 percent. Because of that heads up planning that we do every December that person had the effect of a $10,000 in their pocket benefit.

Bruce: Yes. No doubt about it.

Patti: Those are the things that are important for you to take a look at for our listeners, I should say, to understand throughout the year in terms of where they are from a tax perspective. The point that you brought up earlier, Bruce, is also an excellent point that we look at and I know you look at as well. That relates to Roth conversions.

Bruce: Yes. I had a perfect example of that come in my office yesterday. Gentleman was working for a company, retired early. It was a large company. He’s going to get a deferred comp pay out. It’s not going to be for five years.

He has enough liquid assets to live comfortably for the next five years. His income is going to be relatively low. I said to him, “You know this is a perfect opportunity to convert some of your IRA money to Roth IRA.”

Now, the benefit of the Roth is the fact that once the principal is in there none of the income is taxable as long as you meet certain requirements. It gives him an opportunity to take money that would have been taxed at a higher rate, tax it at a lower rate or no tax at all, put it into the Roth, and then let it grow tax free from there.

Patti: Another sidebar benefit of that is, had he left it in that IRA or 401K when he hits 70 and a half his required minimum distributions would have had to have been higher. That money needed to be pulled out based on the formula.

If it’s in a Roth, there is no such thing as required minimum distributions on a Roth. Every year from 70 on, you’re having less taxable income. That’s going to be a wonderful side benefit that has a compounding effect.

Bruce: No doubt about it. That’s why every situation is different. A lot of people want to do Roth conversions but they’re sitting in a 28 percent tax bracket. It’s like, “Well, why would you do that?” These unique situations that come up, they have to be looked at. It’s a proactive thing. You got to be in advance.

This person has a five year runway before his income goes back up again. I said to him, “We have to plan for the next five years. If anything changes, we can always turn it off.” To me, if we can plan properly, he could probably move, I’m going to guess, probably a half a million dollars, possibly.

Patti: That’s a big deal. That’s a lot of money to be growing tax free.

Bruce: With a tax burden of less than 10 percent. I said, “You’ll have to figure out what the rate of return is.” At the end of the day, the math, to me, is very simple in situations like that.

Patti: It sure is. We also had a situation. We always have to be careful of the unintended consequences of these decisions. One of them had to do with a case that we had.

In December of last year, we were looking at doing this Roth conversion. The person was on the Affordable Care Act. They were getting their medical insurance through Obamacare. They were receiving a really juicy subsidy.

If we actually recognized this income through the Roth conversion they were going to lose their subsidy.

Bruce: And have to pay it back.

Patti: Exactly. That was one case where even though on a global basis from a tax perspective, it made zero sense. They were going to lose a subsidy of almost $2,000 per month. The tax benefits aren’t going to make up for that.

Bruce: No. Those are the things that you have to look at. Big jigsaw puzzle. Got to make sure you have all the pieces for sure.

Patti: It sure is. Absolutely. You got to run the numbers. As it relates to the new tax law, what are some of the other things that you think are important for our listeners to understand? How can they optimize? How can they take advantage of some of the things there?

Bruce: As an example, we’re talking about moving money around and such. Some of the things is, don’t assume. In other words, everybody’s home office deduction is gone. No, it’s not. It’s still available if you’re a sole proprietor or partner, still there. Still applicable if you meet the requirements. Still applicable in Pennsylvania local. Don’t miss it there.

As far as the loss in the deductions, yes, you’re going to lose the miscellaneous. Your fees aren’t going to be deductible. My fees may still be deductible though. Depending upon what the types of businesses you have on your return, rental properties, things like Schedule C sole proprietorships.

We can move some of our accounting fees, not all of them but we can move some of them into those categories. That’s what we worked on to create the deduction. Those are things that we have to look at. That and the biggest thing that I would also say is don’t throw the HELOC loan interest out. Potentially how you use the money is important.

The other thing to watch out for is that alt min credit, what we call the minimum tax credit. You may have it, most people don’t. Just because you paid alt min tax doesn’t mean you have an alt min credit.

The alt min credit only applies to what we call temporary alt min differences. Permanent differences like tax deductions things you will trip the alt min tax but you won’t be able to get it back.

Patti: Let’s stop there. Let me go back and, just for our listeners, why don’t you explain what the alternative minimum tax is, the reason that people used to get hit with it?

Bruce: The alternative minimum tax goes back a long ways. It was Congress’ way of trying to level the playing field, shall we say? They created this, basically, second tax code that ran parallel to the regular tax code. What had happened is a lot of things that were deductible for regular taxes were not deductible for alt min tax.

Once your alt min tax was higher than your regular tax you had to pay the alt min tax. Deductions such as state and local taxes, miscellaneous itemized deductions, those were things that were permanent changes. That created the alt min tax.

The alt min tax also had some temporary differences. I’m going to use ISOs. Nobody gets ISOs anymore. They’re like a…

Patti: These are incentive stock options.

Bruce: Yes. Companies have gone more to restricted units and things like that. Nonetheless, if you got an ISO, the beauty of an ISO is the fact that you exercise the ISO but you didn’t have to pick up the income. That’s absolutely, positively true. Except, for alt min tax you did have to pick up the income.

If you did some ISO exercises, you could end up with a very low regular tax bill but a pretty high alternative minimum tax. That, though, is a temporary difference. Eventually, when you sell the ISO stock, you’ll recapture that minimum credit. That’s been going on for a while. Those are the permanent differences.

People may still have those. If they have the permanent, what we call the minimum tax credit, which is on form 8801, I believe. You should look at that and say, “OK, do I have anything that I can roll forward because I may…?” The law was changed so you may be able to take that credit this year.

Patti: It’s really important that you don’t want this tax credit to be thrown away just because you’re not going to be hit with it on an ongoing basis.

Bruce: You have to be careful if you’re changing accounting firms, if you’re doing TurboTax, carry forwards are critical. You have to make sure that you’ve picked them all up.

Patti: Let’s talk about another group of people that are going to be affected by this new tax law. That is those people who have decided that perhaps this marriage is no longer going to work. People who are going through a divorce, the tax law has significantly impacted, frankly, what they’re not going to be able to deduct. That is alimony.

Bruce: Correct. Don’t quote me on this, I think it’s for agreements written after 2018.

Patti: Correct.

Bruce: There must be some congressman or something that had divorces that were pending. They didn’t want to pass the law right away.

The end result of that is, yes, it’s going to change the structure of divorce settlements. Don’t call me sexist because I’m going to do it this way. Usually, the husband was the higher earner. The wife was the lower earner.

Alimony made sense. We could move money from him to her. He gets a higher deduction. She picks it up at a lower rate. We could work some numbers to make things happen. That’s not the case anymore. Now, it’s a non deductible event. Really, when you get into divorce planning, you have to take that into account. It’s a big shift.

Patti: It is a big, big shift. It’s important as it relates to how property’s actually divided as well.

Bruce: Exactly.

Patti: This was excellent. We’ve talked about a lot of important things, some of the deductions that have been removed. There’s also opportunity, some really good tax planning ideas that you shared with us. There’s always opportunities. You have to know what they are and whether they apply to your situation.

Bruce: Correct.

Patti: Let’s summarize this with three takeaways. What you said regarding the 12 percent tax bracket, anybody that can get themselves into the 12 percent tax bracket by making decisions as it relates to maybe deferred comp, things of that nature, there could be a terrific opportunity to take capital gains and have no out of pocket tax that you have to pay on those gains.

Also, take a look at Roth conversions. These items are especially relevant for people who have retired and are in that window of time between the date of retirement and 70 and a half for most people. That’s really important.

It is a year by year decision point that you want to take a look at. More people are going to be taking the standard deduction. That does create the opportunity for the charitable contributions. It’s called a qualified charitable deduction.

Bruce: Right. I also want to point out because we’ve had clients coming in. They’ve already thrown their hands up. “Oh, I’m going to take the standard deduction.” I said, “Whoa, whoa, wait, wait, wait. Let’s run the numbers.”

About three out of four so far, they actually still could itemize. They didn’t understand what they had on Schedule A. You should always look every year and not assume the standard deduction applies.

Patti: Really good takeaway, Bruce. Thank you. That’s a really good point.

If you are one of those people that it’s better to take the standard deduction, as you look at taking your required minimum distributions and if you want to continue to contribute to charity and maybe get a tax benefit, the best way you could do that is to have a portion of your required minimum distribution go directly to the charities of your choice.

It’s got to come directly from the custodian. You can’t receive it as a check and then make it. It doesn’t count. That’s a home run. You get the standard deduction plus the charitable contribution.

Bruce: Plus, as you talked about, potentially lowering your adjusted gross incomes. Maybe you’ll get medical deductions. Then you may not have to deal with a Medicare tax increase because you’re being able to keep your income lower. I don’t see a downside I guess is what I’m trying to say.

Patti: I’m with you on that one. Absolutely. If you’ve paid alternative minimum tax in the past, understand why you might have a tax credit that you can use against capital gains and other forms of income.

529 plans, home run, especially in Pennsylvania. It’s a great way to pay for or save for college education and reduce the amount of student loan debt that perhaps your children and grandchildren have to take on.

Bruce: No doubt. I had a client this morning, grandchild’s five months old. Client is of significant means. Think of what that child, if they put $75,000 in today and then 18 years from now where that money’s going to be after you manage it properly. Where’s it going to go? Your college is paid for.

Patti: Exactly, with tax free dollars.

Bruce: With tax free dollars.

Patti: That’s an example of a home run, in my opinion, not a single or a double.

Bruce: Absolutely.

Patti: It is a home run. Everybody wins except the government, although maybe the government does win because most of the student loan debt is federally funded.

Bruce: Absolutely.

Patti: Given the default rate on the student loans today, I think the government’s going to be winning as well.

Bruce: Nobody’s going to get hurt in this process, for sure.

Patti: Exactly. Bruce, thank you so much for joining us today. You always bring color and practical insight into how we can take advantage of some of the things that are still available in the tax law.

Bruce: My pleasure.

Patti: That’s it for today’s show. Thank you so much for spending some time with us. If you want to learn more about tax planning, just head over to our website at keyfinancialinc.com, where you can schedule a call with me. I would be happy to introduce you to Bruce as well.

Also, be sure to hit the subscribe button if you liked today’s episode. Turn on those notifications so you don’t miss a single episode. The next podcast that we’re going to have, Bruce and I are going to be joining together again.

We’re going to be talking about the new tax law as it relates to businesses and all of the opportunities that exist for business owners and how you can structure your planning in the calendar year to take full advantage of it.

Thank you so much. Tell us what you like about the shows. If there’s a topic you’d like us to talk about, I’d love to hear from you. Until next time, I’m Patti Brennan, and we’ll see you in the next episode.

Ep8: Forbes Top Advisor Summit: Highlights from Industry Leaders

About This Episode

After presenting at the Forbes Top Advisor Summit in Las Vegas last week, Patti shares some highlights of what she learned from the nation’s thought leaders. Top economists discuss why the Federal Reserve will most likely not increase interest rates this year and Patti also tells a thought-provoking story she learned about Pope John Paul II regarding capitalism.


Patti Brennan: Hi there. 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.

This week, I’m going to be talking and giving you some of the highlights of what I believe is one of the best conferences that I go to each year. It’s the Forbes/SHOOK Conference. It is an invitation only conference comprised of about 1,000 of the top minds in the country as it relates to financial planning, tax, investments, etc.

I got to tell you, this year was no exception. It was outstanding. As I was sitting there, furiously taking my notes to bring back to my office, it occurred to me that you might appreciate hearing some of the things that I learned this year. I’m going to share with you the highlights of everything that I learned at this conference.

Before I do so, I want to tell you a story about something that happened to me as I was traveling. I knew I was going to be sitting on a plane for about 13 hours. Just as I was leaving, a friend of mine had dropped off a book that she really enjoyed, and I just throw it into my bag.

The name of the book is called “The Pope and the CEO” by Andreas Widmer. As I was reading this, I was captivated by so many of the things that he wrote about as it relates to what we do in our world today.

Basically, the book is about a man who was chosen to be a Swiss Army Guard for Pope John Paul II. He talked about all of the things that he learned from John Paul that, honestly, I never realized. For example, I never realized that the pope was such a fervent believer in capitalism.

By the way, I should do this sidebar. This man, Andreas Widmer, went on to become the CEO of many very, very successful businesses. He took the principles that he learned from the pope and applied them to his business life.

He talked about the idea, for example, of John Paul’s beliefs, real, fervent beliefs. One of them was the impact of vocation. John Paul believed that vocation, which is defined as someone’s calling, is something that we all are brought to this world to do. He believed that a vocation in business was as honorable as the priesthood, or a social work, or anything else.

Capitalism, which he also strongly believed in, was defined by John Paul as the ability to serve the need and the want of another human being, because as we do that, when we serve another individual who is also a child of God, in so doing, we also serve God.

I don’t know about you. I just thought that that was so powerful. I take that with me every day now and understand that as I sit with anyone, as I do this podcast, it is my hope that in so doing, I am fulfilling my vocation.

Moving forward, as we get into this [laughs] Sorry about that, everybody let me tell you some of the things and explain what I learned in this incredible conference, the Forbes/SHOOK Conference in Las Vegas.

One of the first speakers was Rick Rieder, the Chief Investment Officer of Blackstone’s fixed income department. Blackstone is one of the largest fixed income managers in the entire world. Rick was amazing.

I will also tell you that one of the main themes that just kept on popping up time and time again through the conference was that the Federal Reserve is probably done. He said the Federal Reserve, Jerome Powell, has literally taken 180 degree turn and probably will not increase interest rates at any point this year.

He also said, as it relates to your bond portfolio, etc., something that was I thought really interesting, he said there’s not enough fixed income in the world to go around. He said the size of the market has halved while the demand has doubled. He went on to say that markets go down five times faster than they go up. We certainly felt that in the fourth quarter of 2018.

The one question that was asked of him, which I thought was a really great question, someone in the audience said, “If you could know something now instead of having to wait until the end of the year, what would it be?”

His answer, right away, was, “Is China growing?” I thought that was fascinating. Just this morning, there was a commentator on CNBC talking about the importance of the Chinese consumer.

He went on to say that the Chinese consumer loves luxury goods and is the second largest consumer of the luxury goods market, and yet it represents 85 percent of the growth according to Bain Capital. It’s a very, very important country. It’s a very important economy as it relates to the rest of the world.

Steve Forbes came on next. He was one of the keynote speakers. He was especially entertaining with his perspective on a whole bunch of different topics. He talked about the wealth tax that is being proposed and tossed around in the Democratic Party.

His only comment on that was that the wealth tax, if it didn’t work in France, it’s not going to work anywhere. He went on to make almost a moral case for capitalism. I loved his definition of it.

He said capitalism is simply defined as meeting the needs and wants of other people. If you’re in business and if you’re doing a really good job, if you have goods or services, if you are growing, it is because you are successfully meeting the needs or the wants of other people. Sometimes they don’t even realize that they want it yet.

Think about Apple. Think about the iPad and what that has morphed into in terms of the iPhone and the impact of the iPhone on economies all over the world and people all over the world in terms of their ability to get knowledge much faster than ever before.

It’s kind of like when the car was invented, right? When the car was invented in the early 1900, it would cost $138,000 to build a car. Nobody could afford a car. Then Henry Ford came along with the assembly line.

Basically, capitalism, as Steve Forbes talked about, it turned scarcity into abundance. More people could afford to buy a car and think about the impact of people having cars on our economy. He then talked about trade and tariffs. His feeling I think probably most of us would agree is that it’s far better to have trade across borders than troops across borders.

Tariffs probably are not a good idea. Tariffs especially hurt China, but they also hurt us. His belief is it is better to slap on a sanction against specific abusers than a tariff affecting everyone.

Getting back to the general theme over and over again as it relates to interest rates, he didn’t really have a prediction on this but reinforce the concept that interest is the rent that we pay for money. Michael Farr, in his February 28th commentary, explained why interest rates are the grieves of the economy. On the face of it, everyone loves free money.

If I can borrow with zero percent for five years for my car, I’m more inclined to buy a car or maybe an appliance. I’m certainly going to think about buying a bigger car or bigger house if I only have to pay four percent on my mortgage instead of six.

This can lead to reckless decisions because the principal has to be paid back. That’s especially not a great outcome if you’re buying an asset that is declining in value. He compares this to kids and candy. I have four grown children. I will tell you that if I let them, they would eat candy all day long until they were sick and throwing up.

Eventually, kids need nutrition. Eventually, the economy, if there is too much debt, you have to pay the debt back. There’s got to be income in order to do so. The good news is that the Federal Reserve is probably done, but we have to be very careful about debts and the rise in the federal debt.

Brendan Ahern, again, the Federal Reserve, same topic, etc. He went on to give real data as to why he believes the fed is done. Inflation is running at 1.9 percent. GDP is at three percent. Wages are increasing. It was interesting. I wish I could tell you who it was, but somebody else said that wage increases don’t cause inflation. Inflation causes the need to increase wages.

I thought that was a very interesting perspective. On a global basis, expectations are very, very low but especially in the emerging markets. A central theme over and over again is that the emerging markets represent valuations that are really appealing.

Professor Jeremy Siegel from Wharton, University of Pennsylvania came in. Boy, he is always just so interesting because he’s got that academic approach. He’s got the practical approach that reinforces why he so passionately believes in what he believes.

He started out with the discussion, among other things, of the Shiller/CAPE ratio. Dr. Shiller, he acknowledged that there’s different ways to try and ascertain whether or not a market is valued fairly, or undervalued, or overvalued.

A lot of people look at the CAPE ratio and get really nervous because as of December, it was just about 30, when the mean over a long period of time has been about 17. It would be natural to freak out and say, “The market is way overvalued. The CAPE ratio is 30. We should get out. It’s going to crash.”

A lot of people come into my office with that concern. What Dr. Shiller pointed out very coherently is that…By the way, as a sidebar, he and Bob Shiller are very, very good friends. They almost have this interesting competitive academic debate as it relates to what their theories are.

He doesn’t believe it’s a relevant way of measuring valuation mainly because of a big change in the accounting rules that occur in 1997 by FASB. That was a point in time when they introduced this thing called mark to market. Among other things, it’s just not relevant anymore because the way the accounting is done is different. The old rules don’t necessarily exist.

Then Dr. Siegel gave a very clear example 10 years out of the financial crisis. He said when you look back to May of 2009, understanding that the historical mean of the CAPE ratio has been 17 in May of 2009, it climbed over 17 for the first time since the crisis.

Keep in mind, if we can go back, the market bottomed at 6,500. At that point, the market was trading at 8,500. Of course, it had gone up 2,000 points. The CAPE ratio was over 17. It was massively overvalued according to Shiller.

Let’s fast forward. It is now 10 years, that magic period of time that makes up the index. It went from 8,500 to 26,000 on the Dow. Again, probably not a relevant index to determine whether or not the market is overvalued, undervalued, or fairly valued.

He also reinforced another theme regarding the emerging markets. Giving a little bit more content as it relates to the why, he said the currencies in the emerging markets are stronger than they were last year. The P/E ratios are running between 8 and 10. The dividend yields in the emerging markets are running between five and six percent.

While this area of the world, emerging markets, are probably the lowest hanging fruit as with everything that I talked about in this podcast, do not go out and load up on this asset class. Please talk to your adviser and understand the risks associated with this in all asset classes. Make sure that it fits within your financial plan.

Finally, Dr. Siegel acknowledged the climb of the US debt to $22 trillion. That’s trillion with a T. It’s almost hard for me to even say. He compared the US debt to GDP, which is the way that most economists look at it. He acknowledged that it is definitely high on an absolute basis but not on a financing basis.

In my opinion, the only thing that’s going to motivate politicians to do something about the deficit is when the debt becomes completely unsustainable on a financing basis. When does that happen? When interest rates rise, recessions occur, etc.

While most of the content with the meeting was educational, there were people speaking on topics relevant to all of us. Dr. Jordan Slane talked about the 10 strategies to optimize your life and longevity. Jon Fussell, a former SEAL team leader, spoke about the power of people working together.

It might be that I loved his presentation because it reinforced everything I believe, but I just found the way that he presented it to be so compelling. He asked all of us. He said, “When you think about your businesses, do you have a group or do you have a team?”

What a team can accomplish is very different than a group. This is me talking. This is the way I look at it. A team is comprised of people who are interdependent, with complementary skills.

It’s like a baseball team. If you have a team of nine absolutely amazing pitchers and the best pitchers in the league, you’re not going to win a game. Someone needs to be able to hit the ball. A team of people with complementary skills is much stronger than those people are individually.

To summarize this conference…Of course, I haven’t gone through all of the things that I learned. I just want to give you the highlights. There were three major takeaways that I got from the conference.

Number one, the Federal Reserve is probably done increasing interest rates. That is important for all of you as it relates to not just your bond portfolios but also your entire portfolio.

Number two, while growth is probably going to slow this year, no one is really seeing a recession for 2019. That’s good news for all of us. Finally, I think that what Steve Forbes said about almost the moral benefit of capitalism is the definition of simply the ability to serve the needs and the wants of other people. That just resonated with me. I hope it resonates with you.

As I close this podcast, it is my hope that this and all of our podcasts serve you and the people that you care about most.

I am Patti Brennan. I am so grateful that you tuned in the today’s show. If you want to learn more about conferences and the things that I’m learning, just head over to our website. There is so much more content that we can share with you. That’s at keyfinancialinc.com.

Feel free to schedule a call with me as well as anyone on this amazing team that I have. Also, be sure to hit the subscribe button if you like today’s episode. Turn on notifications so you don’t miss a single episode.
Please leave your comments on the show. I’d love to hear from you. Tell me what you liked, what you didn’t like, and what you want to hear more about. Until next time. I am Patti Brennan. I will see you in the next episode.

Ep7: Market Crisis and Portfolio Recovery Rates

About This Episode

In this episode, Patti and her Chief Planning Officer, Eric Fuhrman discuss the economic realities that determine how quickly or slowly portfolios will recover from this last market crisis. Patti will leave the listener with three actionable steps to implement during a market drawdown period to help aid in quicker portfolio recovery. These concrete steps provide a sound foundational reminder to help weather any market crisis.


Patti Brennan: 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.
With me today is Eric Fuhrman, our chief planning officer. Today, we’re going to be talking about bear markets. We’ve just gone through a very painful period in the fourth quarter of 2018. We thought it would be really important to put it into perspective and talk about. Gee, when these times have happened historically, how long did it take to recover?
Eric, welcome to the show.

Eric Fuhrman: Patti, thank you so much. I have to be honest. These podcasts have become more of a regular thing. I literally stay up at nighttime just wondering what the next topic is that we’re going to be talking about and sharing with our audience.

I literally count the days between the time when you and I can come in studio again and talk about all of these very interesting things that we find fascinating and hope that our audience does, too.

Patti: You know, folks, he’s not kidding. I have received emails from Eric in the middle of the night and on weekends on various topics that he thought might be a good idea for us to talk about.

Eric: So true. My wife would verify that as well.

Patti: [laughs] Let’s talk about what just happened. Historically, when we think about it, we’re about to celebrate, if that’s a real thing, the 10th anniversary of the financial crisis. The scars of the financial crisis, they’re still with people today. It feels like it happened just yesterday.

When we were going through that awful drawdown period at the end of 2018, a number of people were worried and thinking we were going to have another experience like we had in the financial crisis.

Eric: That’s so right, Patti. It’s still just such an awareness and a heightened sensitivity to market volatility since that financial crisis for so many of our clients that lived through it. This topic is so timely because there’s a lot to unpack here.

The reality is that risk and return are inextricably linked. We can’t deny that. Over the long run, stocks are going to provide higher, long term returns than cash because the very existence of the capital markets depend on it. That’s why they’re there.

It’s important, imperative for anybody who desires to reap a return in excess of, say, a government Treasury bill. You have to accept that certainty is the enemy of growth.

Patti: Oh, Eric, very well said. That’s worth repeating. Certainty is the enemy of growth. Hey guys, I understand. We all want great returns. We all want that wonderful long term trajectory that you see on those mountain charts. If you look closely at those mountain charts again, there are periods of time those where markets also go down. They don’t go straight up.

Eric: Right, and you have to remember too that uncertainty is the very mechanism that makes those long term returns possible that allow people to help fund college, purchase that dream home, or retirement in so many cases. If anything, I would say you have to embrace uncertainty. Nobody likes these periods of time, but they’re a reality that we have to deal with.

Patti: It reminds me of when I was in the ICU. People go in for open heart surgery. Nobody wants to go in for the surgery, and it’s an uncomfortable period of time because it’s a really traumatic event in a person’s life. There’s so much focus on that patient when they’re in the ICU, and what is equally if not more important is that period of recovery.

Ultimately, how quickly that patient recovered had to do with how good of shape they were in before they had the surgery. It’s really important as we talk about this to keep in mind that how quickly you recover, the impact that it has on your financial life ultimately depends on the planning that you did going up to the bear market as part of your overall financial plan.

Eric: Normally I would like to avoid unnecessary comparisons between the financial industry and the medical field, but you can actually speak intelligently towards that as a former ICU nurse. Wouldn’t you say that the more acute that condition is, usually there’s a longer recovery period that comes along with that.
The more severe whatever the patient was going through, the longer you can expect the recovery to be, and you see that in the markets as well.

Patti: No question about it. If you go in for outpatient surgery, your recovery time could be in weeks. If you’re going for major major surgery, whether it be abdominal or heart or what have you, it could be six months or a year. It ultimately depends on many different factors. Again, nothing to be afraid of. At the end of it all, you’re going to have a healthy heart, you’re going to have better working legs or whatever it might be, but it’s painful to go through.

Eric: Listen, before we start unpacking all of this here in this relatively 15 to 20 minute session, why don’t we start with some definitions because in order to help the audience and the listeners out there truly understand what we’re talking about they need to have a good understanding of some very important definitions. Why don’t you go into that?

Patti: There’s three definitions that are important for you to understand. First is the drawdown period. That is the period from the tippy top peak of the portfolio down to the bottom, from peak to trough.

Eric: That’s basically the event.

Patti: Exactly.

Eric: The drawdown event, something that’s causing that.

Patti: Then there’s the recovery period. Once it hits that bottom, how long does it take to get from that bottom back up to where it was before the event occurred?

Eric: Or the highest statement that you got in the mail, how long does it take to get back to that point where we’re happy again?

Patti: The underwater period, which I think is real key, is the combination of both. From the beginning of the event, down to the bottom back up, that’s called the underwater period. We’re going to go through periods of time when we’ve had these drawdowns and what happened afterwards.

Eric: Why don’t we get into a couple of examples for the audience to give them the sense of an extreme event and then maybe an event that was more similar to what we just went through over the last two or three months, just to give them some idea of what these look like and how long it took to recover?

Why don’t you start off with probably the most notorious and extreme event that most people would remember, which would be the financial crisis that was about 10 years ago?

Patti: Sounds good. I’ll take the tough one. Basically, during the financial crisis, if you had 100 percent of your money in the stock market, you lost during that drawdown period 51 percent. It took a year and four months from beginning to end. The recovery took just over three years. That total underwater period was four years and five months. That’s 100 percent invested in the market.

Eric: What you’re saying is for our listeners is the round trip or the peak to peak from the start of the selloff to actually getting back if you were in all stocks was almost four and a half years if you were a buy and hold portfolio.

Patti: Exactly. I was just going to say that. We’re not taking money out of the portfolio. We’re not adding it either. If you take a more balanced approach, 60 percent in stocks, 40 percent in bonds, that drawdown was 31 percent, and the underwater period from beginning to end was three years. Even more a conservative portfolio, 20 percent loss, two years complete round trip.

The takeaway here is that so that a more balanced approach you didn’t go down as far, and your complete recovery period was shorter.

Eric: The lesson is if I buy and hold or if I become more conservative that the drawdown’s going to be less, and as such then our recovery times will be faster. The underwater period will be faster if we take a more conservative approach, but if I’m a long term investor trying to grow for retirement…


Patti: It’s important that we keep all this in context. We’re going to be talking generalities here, but everybody is different. It’s not to say that everybody should have a 40/60 portfolio, 40 percent in bonds, 60 percent in stocks because that portfolio, generally speaking again, on average is going to have a lower long term rate of return than one that would have more in stocks.

Sometimes people need a higher rate of return to accomplish their objectives. What’s the right balance for you? That’s going to be a case by case basis.

Eric: What you’re telling me is there’s no magic bullet. If I’m trying to get good long term returns I have to deal with the drawdowns and the longer recovery period as long as I have enough time.

Patti: Exactly. Let’s now go through an example that is probably closer to what we’ve just experienced, the Russian default on their currency that occurred in 1998.

Eric: This is going back about 20 years now. When the Russian debt default happened this bears a striking resemblance to the selloff that we just had in terms of the magnitude of the selloff but also the duration because it was so fast. Let’s take your example. If you look at a portfolio that’s 100 percent in the US stock market, your portfolio, the maximum drawdown was about 17 and a half percent.

That occurred in a short window of two months. Just as you said before the more conservatively positioned portfolios are going to experience much less drawdown. The other extreme is if you were 40 percent stock, 60 percent bond portfolio, you were only down about 6 percent. In all these cases, despite that extreme drawdown and probably how bad it felt these portfolios, all of them recovered within three months.

Despite a 17 percent selloff or somewhere in between, within a five month period from beginning to recovery, that’s all it took is five months to recover a 17 percent loss. Again, it’s important for people to have some resolve and some resiliency, despite what we went through, that we’ve had periods like this before.

To become very conservative or start making changes…You could probably talk to this…could definitely affect that recovery period if you become more conservative at the wrong time.

Patti: Absolutely. It’s going to take much longer to recover if you make changes while it’s happening.

Eric: After the drawdowns already occurred.

Patti: The worst thing that anyone could possibly do. It’s also important for us to recognize, for those of you who are not feeling great about what happened, it was pretty bad. In fact, we have to go back to 1972. It was the fourth worst drawdown since 1972. The two worst ones occurred between the tech bubble and the financial crisis and that’s a long period of time.

If you’re not feeling great about what just happened, I understand because it was a tough period of three months.

Eric: The crazy part is I’ve been in the business for about 15 or 16 years, so what you’re telling me is I should feel good because the three worst drawdowns happened in the first 15 years of my career. It should be good from this point on, right? [laughs]

Patti: I will tell you something that someone said to me. Because you’ve experienced these at a relatively young age, it will make you and has already made you a better advisor because you’re going to help that many more people go through these periods of time and get on the other side.

Eric: What’s interesting about that, let’s take the other side. Yours truly over here, you have 30 plus years in the business, so you could probably speak to other events and drawdowns that we’ve lived too, going back in the ’90s and even back in the ’80s.

Patti: I was a brand new financial advisor in 1987 with the crash of ’87, 29 percent in one day. It was interesting because the number one selling book the end of that year was “The Great Depression of 1990.”

Eric: Oh, my goodness. [laughs]

Patti: The fear and the hype and all of that was so palpable, and yet it didn’t happen. We want to keep all of this in perspective and make sure that everyone listening understands that this is not that unusual, and we’re going to get on the other side of this.

Eric: What’s interesting is the two examples that we framed are looking at a buy and hold portfolio. They’re going to recover as things come back. What if you’re taking cash flow? That is so important for a lot of our clients and other people who might be listening that are retired and are actually taking money because taking cash flow from the portfolio can have a dramatic, a profound effect on how long the recovery actually takes.

Patti: Not only does it have a profound effect on the numbers, retirees I find feel it more, A, because they’re probably watching television more or they’re reading the newspapers. They’re that much more vulnerable to the headline risk that is out there. That’s all these newspapers and TV is talking about, “The market dropped so much today. The market dropped so much today.”

Meanwhile, that retiree is taking money out. They’re feeling, “Oh, my goodness. I’m not working. I’m never going to be able to recover from this.” Let’s talk about that aspect of it because there are times if we do this incorrectly where that person won’t recover.

Eric: Let’s go into our first example, and you can give us the detail here. You and I, in talking about this and researching the subject said, “What about somebody who just completed a 20 year retirement horizon?” Basically, they retired on January 1999, and they’ve officially completed a 20 year period in retirement.

What would that look like if that person started out with a million dollar portfolio, and they needed to take $40,000 in year one for retirement? What was their experience in terms of the drawdown, how long it took to recover, the underwater period, and where they stand now? Why don’t you dive into that?

Patti: Eric and folks listening, it really depends on their spending policy. If they’re going to be taking a rigid approach to the spending policy, in other words, a $40,000 fixed every year increasing by inflation every year, their outcome, which is all we care about is the outcome is going to be very different than someone who will take a more flexible approach to it.

In that fixed spending policy, you take out $40,000 a year every year, in that, given this period of time, in that situation 100 percent stocks had a drawdown of 64 percent. A lot of loss during that drawdown period and the drawdown period was eight years and six months. The real kicker with this is that person is still underwater.

Eric: Meaning they still are not at a million dollar balance. After 20 years they have less money than they started with.

Patti: That’s exactly right. Whereas if we take a more balanced approach, say a 60/40 blend, the drawdown was almost half at 38 percent. It was still the same period of time, but the recovery was the total underwater period was 13 years. That person has about $1.1 million as of the end of 2018.

Eric: Let’s put a little context here. This person, they started at precisely the wrong time. What we’re talking about here is a sequence of return risk, which is so important for retirees on cash flow. Basically, this person experienced the dot com crash and the financial crisis, a double whammy if you will, in their 20 year period.

Patti: All within a very short period of time.

Eric: Basically, if they started then it took until 2012, 2013 before they finally got back to even despite that.

Patti: Exactly.

Eric: Wow.

Patti: Plan B, and you know we’re always big on plan B.

Eric: Advisors love plan B and plan C, right? [laughs]

Patti: Exactly, and by the way, there’s 26 letters in the alphabet.

Eric: [laughs]

Patti: Many, many alternatives.

Eric: Have a contingency plan.

Patti: Always. By the way, we’re