Ep82: It’s Time for Medicare Open Enrollment!

About This Episode

Patti meets once again with her Chief Planning Officer, Eric Fuhrman, to sift through all the Plans and regulations of Medicare. Open enrollment for 2022 starts October 15th and ends on December 7, 2021. Each Plan offered in Medicare has different coverages and it’s important that consumers are aware of the inclusions and limitations associated with each. Patti and Eric carefully dissect the nuances of each Plan, while also reminding the listener of key dates in the timeline to be aware of. Also discussed are key considerations if a spouse is still employed and has other healthcare coverage.

Patti Brennan: Hi, everybody. Welcome back to the Patti Brennan Show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me today again is the professor, Eric Furhman. Eric and I are going to be talking about a wonderful topic. It’s Medicare, and the dos and don’ts during the open enrollment periods, as well as the other enrollment periods that are relevant to Medicare and some of the different coverages it provides.

Welcome to the show, Eric.

Eric Furhman: Thank you, Patti. Good to be here again. I’m really excited for today’s topic. I was having trouble sleeping last night, so I’ve had to double my caffeine intake to be ready to go for this one.

Patti: This is the most exciting topic, isn’t it? I’m sure all of you who are listening and watching today are just at the edge of your seats, right? We’re going to make this fun, enlightening. There’s a reason why you’re tuning in right now.

Eric: I like to think from the listener’s perspective. I always like to try and put myself in their shoes. I like to believe it’s because the Patti Brennan Show is the most electrifying podcast in the financial industry, but I think under the surface, what’s really important, and I hope what people keep tuning in for is that it’s educational.

It’s content-rich, and more importantly, the topics are timely. That they’re germane to the present situation. We’re looking at Medicare open enrollment, which starts in two days, and that’s what we’re here to talk about today.

Patti: And, most importantly, we’re going to end the show with key considerations, action items, things to consider, so that it’s also really practical.

Eric: Yep, absolutely, and keep your ears tuned in because you’ll have a little notification when the key consideration comes in to really reinforce the topic.

Patti: Absolutely, OK. Let’s start from the very beginning, Eric, because I think it’s really important that everybody sets themselves up properly as it relates to getting the best coverage they can for the least amount of money. Let’s talk about the initial enrollment process.

Eric: Yep, absolutely. I think you brought up a good topic, so spoiler alert. We’re talking about a government program, so it’s complicated. There’s a lot of things that you have to navigate when it comes to open enrollment.
As you point out, there are many different enrollment periods. We want to highlight all of those today, not just the open enrollment period, which is most relevant between now and December…

Patti: I don’t know about you, Eric. I find this is the most misunderstood area during open enrollment. People think, “Oh, I can change anything.” The answer is, “No, you can’t.”

Eric: You can make some really critical mistakes if you’re not careful or working with somebody to provide proper guidance. I think the big thing is that, really today, the open enrollment is applying to people that are already on original Medicare and Medicare Advantage.

That’s what the open enrollment period that we’re about to enter is for. Really, each year, Medicare publishes information, data, and statistics on these plans that are provided to participants. Then open enrollment’s really that opportunity to go through review coverages, review changes, review costs, and then be able to make a change if there’s a better option that fits your needs.

Patti: Right, because you may have selected a coverage, a company, or what have you, and they may be taking away some of the coverage that you actually need. You got to go back to square one and say, “OK, what’s plan B?”

Eric: Yeah, exactly right. Maybe a good segue here is to start and say, “Well, when can you initially enroll?” There’s that initial enrollment period that applies when you’re approaching age 65, so maybe that’s a good place to start.

Patti: Let’s do that, because, boy, if you don’t do that right, it could be an expensive mistake. Let’s talk about when can people start to enroll for Medicare?

Eric: Basically, age 65, that’s the critical number. When you’re within three months of your 65th birthday, the month of your birthday, and three months after, that’s a seven month enrollment when you can enroll in what’s called “original” Medicare.

This is the Part A hospitalization, Part B, which is the medical insurance, and then you can get a meta gap policy and so forth.

Patti: Let’s really simplify this, Eric. Part A, hospitalization. Part B, basically anything but hospitalization.

Eric: Right, seeing the doctor, tests.

Patti: Seeing the doctor. Think about it as inpatient, outpatient. That’s A versus B. Now, inpatient, understand that it only covers 60 days. Part B, outpatient, again, there’s different levels of coverages, etc. That’s really important to distinguish.

Now, you don’t have to get what is called a meta gap policy, but this is the time also to be looking at that kind of coverage, as well as Part D, which is prescription drug coverage.

Eric: Exactly right. The thing that you have to consider is, when you’re getting to 65, some people might not be working and retired, at which case, you want to transition to Medicare. There are many people that may be working, or they have coverage through a spouse who is working.

There’s a critical distinction there to determine whether or not you should sign up, because that can really make a difference. The distinction for Medicare’s purposes is how many employees work for the employer?

If you work for an employer with more than 20 employees, then the group plan is the primary player. Medicare is secondary. In that instance, you don’t have to sign up for Medicare at 65, because you have coverage through the group plan, and the group plan’s the primary payer.

If you’re working for a very small employer – and most of the employment in America is through small business, where there are less than 20 employees – then, in that case, Medicare has to be the primary payer, and the group is secondary.

If you’re in a situation like that, you need to sign up for Medicare Part A and B, because if you don’t, then you won’t be able to get in under what’s called the special enrollment period, where you are exempt from these late enrollment penalties. It’s really critical to get in that seven-month window.

Patti: It’s a really important time to evaluate, “OK, what’s the worst thing that could happen? I’ll sign up for Medicare, and OK, I’ve got the group coverage, but Medicare is pretty darn good, too.” I think there’s a lot to consider and really understand in terms of what’s the penalty if you don’t sign up for Medicare?

Eric: Right.

Patti: Why don’t you go through that? That, to me, is really the issue here.

Eric: You’re right. If you already have coverage, and there are more than 20 employees, you don’t have to sign up. You have what’s called credible coverage. It’s a special kind of exemption, where you can get in under a special enrollment period eventually when you retire or lose the employer coverage.

The question is, should you sign up anyway? Is there any downside? Usually, signing up for Part A really doesn’t have a downside. There’s no premium to it. The only consideration there is if you’re participating in a healthcare savings account.

You can’t have Part A in a healthcare savings account, because there’s a penalty. There’s basically a six-month lookback.

Patti: Let’s take a step back. An HSA is an account that is established if you choose a high deductible savings plan. You choose the high deductible savings plan, and then you have the HSA, which is really, it’s one of those free lunches that probably will go away at some point, but it’s a really good deal in the right set of circumstances.

This is not one of them, OK? Once you hit 65, you really do want to turn that off, because the penalties of keeping it are significant. To me, I think about this whole issue when I think about insurability, because if you don’t sign up and get the proper holistic, all-around coverage, you may not be able to get the kind of coverage you want without proof of insurability.

An insurance company can say, “Hey, you know what? You had your opportunity within that seven-month period of time, but you’re not looking so healthy anymore, so we’re going to deny providing coverage for you.” That, to me, is a huge risk.

Eric: Again, this would go, I guess, beyond when there’s employer coverage, but talking about what’s the guaranteed issued rights with your Medicare supplement or meta gap policy. Which will tie into some of the special enrollment considerations and so forth with some of these other things.

The initial enrollment, I think the big thing to tie it together is it’s a seven-month period of time where you can sign up. Again, you want to do that unless there is existing group coverage. Again, the number of employees in that group plan, or the number of employees in the employer, really dictates whether you sign up or not.

Patti: I think the other thing that we need to consider is if someone is no longer working for their employer. Let’s say that they’re 64 and six months, and they are no longer working for their employer. They decide to go on COBRA.

Rightfully so. That’s the right choice. COBRA lasts for 18 months. However, that seven-month period, and the exclusions, if you will, are based on when the work stopped, not when COBRA ends.

Eric: Right.

Patti: Which is really, really key.

Eric: Yep, exactly right. That’s a careful consideration, too, because a lot of people would think, “Well, I have COBRA, and then it’ll just switch when it’s over.” The work stoppage date is the real key date there that determines when the clock essentially starts ticking in terms of your ability to enroll.

Patti: Let’s think about the example where somebody has a high deductible plan, they’ve been doing the HSA, they can’t do the HSA anymore. Is that really that bad, when we consider what the deductibles are?

Eric: Yeah, I guess that’s the question. It depends on what’s happening if it’s a Medicare-approved expense. I guess in theory, if you’re on a high deductible plan, you have to spend a lot of money out of pocket before the plan pays.

When you sign up for Part A – so when it’s an instance of hospitalization, because that’s what Part A’s covering, so let’s say you have some kind of surgery – the Part A deductible is much less. It’s less than $1,500 a year.
In essence, signing up for Part A, you have an event. You really only have to meet – again, you have to check the circumstance, but – potentially just the Part A deductible before Medicare would step in and pay.

Again, there’s no premium, and you might have a lot less out of pocket by signing up for Part A, even if you could delay it.

Patti: That works for me.

Eric: Yeah.

Patti: All right, good deal. Open enrollment, here we are. It’s open enrollment period. What can people do during this period of time? Let’s frame it in terms of the dates. It starts October 15th and goes to December 7th.

Eric: Mark it on our calendar every year at Key Financial. What are the big dates? Open enrollment, Patti’s birthday, that’s in there.

Patti: Wrong. No, no, no.

Eric: Make sure that’s on the calendar.

Patti: I don’t want anybody paying attention to my birthday anymore. No, no, no.

Eric: Right, exactly. I think the key thing for the listeners to understand is that this is for people that have a Medicare Advantage plan or are on original Medicare. This is not when you’re first eligible. You’ve already got care.

This is the period where, really, there is the most flexibility to make changes. If you’re on original Medicare, you can switch to a Medicare Advantage plan, which is called Part C. If you’re on Medical Advantage plan, you can go to original Medicare.

You can go from a Medicare Advantage plan to another Medicare Advantage plan. Prescription drug coverage is big here. This is where you can move from a Medicare Advantage plan with no prescription drug coverage to one that offers coverage.

You can go from a plan that does have coverage to one that doesn’t. I’m not sure why you would be compelled to do that. You can also join a Medicare drug plan, and you can switch between drug plans. The drug plans are referring to Part D. This is where you can go back and forth.

Again, you’re switching the main medical coverage, and also, the ability to switch the prescription drug coverage as well.

Patti: Here, I think it’s important for all of our listeners and everybody watching. It’s really important to develop a relationship with somebody who is really plugged into this area, because either you do this or you don’t.

Every year, these companies will change what they’re going to cover. You might be on a statin, for example, they may have covered it for the last five years. All of a sudden, they decide, well, they’re not going to cover that particular statin.

You’d have to go to that one, and your doctor doesn’t really want you on that other one. OK, you go to a different company that will provide and cover the meds that you’re actually on. This is an area where it really helps to develop a relationship with someone who knows you and is willing to do that legwork to figure what’s going to be the best coverage for you?

Eric: I have to tell you, I feel like had a moment there. I think we literally got into ICU nurse Patti, and you just came right out. We got the ICU nurse. That was great. Talking about statins and things like that.

Patti: Yeah, absolutely. You know what? As long as we don’t start talking about Vtac and Vfib, we’re good, Eric. We’re really good.

Eric: You would have to do that podcast solo because I’ll just be a listener on that one.

Patti: All right, good deal.

Eric: I think what’s important to understand, too, is that you’ve got a lot flexibility to change. You can actually change your mind multiple times within this enrollment period. The one thing you can’t do is switch the meta gap policy, or also known as Medicare supplement policies.

You can’t make changes there. When you’re on original Medicare, you have Part A, Part B, and then you have to have a supplemental. You can’t make changes to the supplemental. That’s very, very rigid, so I think that’s important to understand.

Patti: The meta gap policies are those policies, just to make sure everybody understands, it’s those policies that go by the letters. They go from A to N, and the coverage is different, depending on the letter. This is heavily regulated, by the way, so it is important for you to know that there is a net under there.

It is really important – this, again, is where the initial enrollment period comes in – you really want to make sure that you’re going to have the coverage that you might want and need. The cost is the cost. It’s all part of this whole healthcare issue.

Eric: I think the other important thing for people out there to recognize is, if you’re happy with your current coverage, just don’t do anything. Just keep it the same. Everything will become effective on January 1st. If you are going to switch, because there’s a more compelling plan, better pricing, there’s no medical underwriting to switch plans.

It doesn’t matter what the health history is. You can go from one plan to the other, and so forth. Depending on that distinction, do you go from original Medicare to Medicare Advantage? No problem. You basically enroll in Medicare Advantage. That will drive you out of original Medicare.

Patti: I was just going to say, there is a distinction there, right?

Eric: You’ve got to be careful. The real consideration is if you’re in Medicare Advantage and going back to original Medicare. Part of the issue here that you can expand upon is that, what you’ve got, if you’re going from Medicare Advantage to original Medicare, you’ve got to get that supplemental plan.

There’s very narrow criteria for what’s called guaranteed issued rights, meaning can you get into the plan without any kind of underwriting or where the company can deny you or charge you a higher premium?

Patti: Let’s step back for a sec. We talked about Part A, Part B. Now, we’re talking about this Advantage stuff. Medicare Advantage is considered Part C. All it is, folks is it’s a bundle of all of the different coverages.

Medicare Advantage tends to be lower cost, lower premiums. It looks really good when you look at the different things that it will cover that are not covered under Medicare A or B, and even some of the meta gap policies.
It’s a very attractive alternative, and it may be for the rest of your life. You’ve just got to really be careful because once you have it, it might be difficult to go back to original Medicare. We have had situations here at Key Financial where the Part C Medicare Advantage coverage began to be…

It was not nearly as comprehensive. They were having much more difficulty getting things covered. They wanted to go on standard Medicare, which is heavily regulated, as well as the meta gap policies, and they could not. Very important, because they had health issues.

There wasn’t an insurance company in the world that was going to insure them for the meta gap policy, so there was a huge exposure, meaning over 60 days in a hospital, it was all on them if they move back.

Eric: Right. I think anyone listening might, after hearing that – because you hear these horror stories – they would have a natural apprehension of going away from original Medicare to Medicare Advantage, but there’s something in Medicare Advantage called trial rights.

Patti: Good point. Very good point.

Eric: Let me ask you, if you’re a consumer, do you like when you get to try something?

Patti: I love it, yep.

Eric: You’re not committed. You can give it back.

Patti: It’s the puppy dog clothes, Eric. You take the puppy home, you fall in love with it. You’re not giving that puppy back, right?

Eric: Right. It’s just like cars. You get to now drive cars to see if you like it, and you can bring it back.

Patti: Wouldn’t that be nice, to be able to drive a car for 12 months, and then give it back if you don’t like it.

Eric: Well, here you go. That’s what Medicare Advantage trial rights are all about. If you enrolled, during that initial enrollment period, if you get into Medicare Advantage first, and you don’t opt in to original Medicare, you can switch back to original Medicare and get into a meta gap policy, where there’s guaranteed issue, if it happens within the first 12 months.

Also, if you’ve never been in Medicare Advantage, and you say, “I want to give it a try,” if it’s your first time in Medicare Advantage, again, you have those guaranteed trial rights, whereas long as, within the first year of joining, you had that…

I think you phrased this beautifully. I don’t want to steal for thunder here.

Patti: Go for it.

Eric: I think you said, “Mulligan,” right?

Patti: Yep.

Eric: To go back and still have those protections in place. These protections are not there if you’re someone that is just terribly indecisive, and you just keep going back and forth.

Patti: Right, switching plans.

Eric: You only have that preserved one time, for the first 12 months, and that’s it. You do get that trial period, and we’re consumers in America. We love trying stuff for free.

Patti: You know what, Eric? This is one of many things I love about you because here we are, we’re talking about this very arcane type of subject, and you just provide a balanced approach. Don’t be afraid. Don’t be freaked out about these, sharability issues because you do have this opportunity, and it still might be the right coverage for you.

Eric: I think the other part, too, which maybe we haven’t properly explained, is a lot of people may not know about Medicare Advantage. What’s the difference with traditional Medicare? The way I have always understood it and read about it, basically, it’s like your employer coverage.

It’s a one-stop-shop that really has everything together, the limitation there is you’re working with an insurance company. You’re within a network in terms of how your care is provided, where Medicare is ubiquitous. It’s accepted across the country, no matter…You can basically go anywhere, but just an important distinction there.

Patti: Have we covered everything that we need to in open enrollment?

Eric: I think we’re good there. The key consideration, right?

Patti: Oh, there you go. Ding, ding, ding.

Eric: There we go, yeah, bringing that back in. The big thing is that’s where the most flexibility is for people to update and make changes, but it’s not the only run. There’s the Medicare Advantage open enrollment that starts January 1 through March 31st. It’s a second bite at the apple if you will if you decide you want to make changes.

Patti: For anybody who’s listening to this, and you’re driving, please don’t worry. You do not have to be writing this stuff down, because we’ve provided all of this information on a white paper. You’ll have it right on our website.

We’re going to be talking about actually five different periods, and they’re all really important. We’ll have the key considerations in the white paper, so you can just go to our website at keyfinancialinc.com, print that out, and you have it right laid out in front of you.

Eric: Yep, exactly. When you log in, you’ll see Patti’s angelic picture on the front, so you know you’re in the right place.

Patti: Oh, boy. Oh, boy. I’m going to put your mug up there, you know what? That’s what we should do. We just rotate it, because this is really a lot more than Patti Brennan, that’s for sure.

Eric: You’ll have to bury it somewhere on the website, so who knows? The Medicare Advantage, that’s really where, if you’re on Medicare Advantage, you can then again switch to another Medicare Advantage plan, and you can also drop your Medicare Advantage and return to original Medicare.

Now, the distinction here is you can only do it once in that period from January 1 to March 31st. You can’t change your mind one election, then it’s done. Again, Medicare Advantage to Medicare Advantage or Medicare Advantage to original Medicare.

What you can’t do, unlike open enrollment, is go from original Medicare to Medicare Advantage. That’s really the big thing there that you can’t do. It’s much more limited in scope.

Patti: You can’t change drug coverages. You can’t do a lot of the things that we’re able to do right now, right?

Eric: Yeah. There are a couple of other can’t dos, but yes, you’re right. If you’re in original Medicare, you can’t switch your prescription drug plan and so forth. Again, a couple of considerations there.

Patti: Very good.

Eric: Then there’s another one. These dates are overlapping, but then there’s the Medicare general enrollment period. I hope nobody takes offense, but we consider this the procrastinators’ enrollment period.

Patti: Yeah, and it’s important, because there are those procrastinators out there, or they may not have realized the time limit in terms of when they have to enroll. For those of you who are listening, if you’re not on Medicare, and you’re like, “Oh, my goodness. I guess I need to do this,” when can you do it, and what are the caveats to that? There are some.

Eric: That Medical general enrollment period gives you the second chance if you didn’t get enrolled during that seven-month enrollment period, but the downside is, OK, you can enroll, but your coverage doesn’t start until July 1st.

You’re going to be without insurance for a significant period of time, and unless there’s some kind of special circumstance, you’re probably looking at a late enrollment penalty for, say, your Part B coverage, Part D, and so forth.

Patti: We should probably talk about Part B because that’s not free. What is important for everybody to know is that the premiums, I think, based on, let’s say, $81,000 for joint filers, you’re in the $180 per month range, per person.

It can quickly rise to close to $500 per person, per month, for just Part B, not even including the meta gap policy. This is not going to be without its costs. It’s important when you do your financial plan to include the cost of these coverages in your retirement projections because they’re there.

I would also include a buffer for additional things that may not be covered, to the extent that you want them to be. Again, understand that, while you may not be on meds today, drugs today, you may be in two years or five years, so that’s another important consideration.

We find that those are the issues that can be cost-prohibitive, where people really get smacked. They go to the pharmacy, and all of a sudden, they’re paying a $700 pharmacy bill, because they just had to pick up their prescriptions for that month.

That’s a real surprise for many people, so really just make sure you understand the rules of the game with the coverage you’re selecting and continue to review it.

Eric: Absolutely. All good points to cover, and especially when you’re in retirement, most people then transition to a more rigid income structure, so really making sure that you’ve got affordable coverage. You avoid these self-inflicted wounds of late enrollment penalties, which are totally avoidable that you do that.

Patti: What’s this thing with the special enrollment period? I really like that part, Eric. That’s another period where, again, not so much a mulligan, but all is not lost if you didn’t enroll in Medicare, because there are some exceptions to the rules.

Eric: Special enrollment period, this is where I feel like we really go down the rabbit here.

Patti: OK, I’m ready.

Eric: You do it again. Just so people know as well, a great reference, and I’ll put in a little plug for them, is medicare.gov. That’s where most of this information is coming from, so all this can be found on that website to tell you about these situations.

The special enrollment is one where there’s so many unique situations that might apply, I don’t know that we can cover them all in this with the time that we have.

Patti: One of them that’s very practical, let’s talk about something that happens all the time. We’ve got people who are moving from New York to Florida, Pennsylvania to Texas, whatever. California has a lot of people going to Texas.

OK, you’re 68 years old. You’re on Medicare. What do you do then? These coverages are based on the state in which you reside, and in most cases, the county in which you reside. What do you do then?

Eric: Exactly right. That’s one of those special circumstances, where if you move to a different service area, and that coverage isn’t provided, then you have that special enrollment period to make the change with guaranteed issue rights.

It’s interesting how they define “move.” Most of us would think moving from, say, state to state, but there’s other things. If you’re working in a foreign country, and you come back to the United States. If you move into a skilled nursing facility and then come back out, that’s another opportunity to change.

The other one that’s listed there is if you’re released from jail, that would be technically a move.

Patti: Oh, I’m really happy to hear that one.

Eric: Yes. If you’ve been in prison for some period of time, you can do that as well. Also, too, these changes, you can lose coverage because you left an employer, or again, and we said, COBRA comes to end. Again, you’ve got to pay attention to COBRA, versus when your work stoppage is.

Or the plan, Medicare can terminate the plan, sanction the plan. The plan may not renew. Believe it or not, there’s lots of other situations beyond your control that could happen and put you in a special circumstance, where you can make the change.

Patti: Which is, again, really important, because I just always look at the insurability, that guaranteed issue situation, because these insurance companies, they’re getting tough out there. They really are getting tough, and they’re not going to take any risk that they can avoid.

That’s really important, I think, as we relate to this medical insurance, and making sure that, if something happened, you’re not going to bankrupt yourself.

Eric: Absolutely. The big thing is making sure you can get coverage, is one thing. The other important consideration here is the timing. Usually – and every situation’s different, but usually – within two to three months of this event is when you have to file for the change.

The window there is pretty short. You’re not getting the seven months, the six months, or the eight months. It’s usually two to three months after that circumstance that you’ve got to apply for the change.

Patti: Boy, it’s the government, so keep proof that you contacted them. Write down the people, the names, the dates, the time that you called. Try to send emails, if you can. It’s just a mess out there, so keep the proof, because there is a time limit.

Eric: Yeah, absolutely. Sadly, I guess we are rolling to the last topic.

Patti: Yeah. Now, we’ve covered the special circumstances, the special enrollment. Now, we’ve saved the best for last.

Eric: Oh, boy. I can’t wait, right? Here comes dessert.

Patti: Let’s talk about the five-star ratings. What is that all about?

Eric: The five-star rating, basically, Medicare goes out, and now, they collect surveys, pricing data, and so forth. They assign a star rating to Medicare Advantage plans and Medicare prescription drug plans, or Part D.

The important point to note is that there’s only, what was it, 21 five-star Medicare Advantage plans that are out there.

Patti: They’re not available in every service area, right? It’s not like you have 21 Medicare Advantage plans to choose from where you live.

Eric: Yeah, the five star enrollment, it’s another unique area of this whole enrollment dialog, but it may not even be available to you, as you said, because it’s not available in all service areas.

Patti: Eric, this is bizarre. It feels like the rotten tomatoes when they’re rating movies, and you’re only going for 80 percent. You want the best ratings. Why is the government doing this all of a sudden? It feels like – I could be totally off base, but – now the government is rating insurance plans?

Are they trying to get people to choose Medicare Advantage, so they’re off of original Medicare? Are they trying to incentive, say, “Hey, you’ve got to look at this insurance company over here. They’re pretty darn good. Then we don’t have to pay for your coverage, and we don’t have to cover you in you’re in the hospital, or you get really sick, and you need chemo, and all of that”?

Again, I could be wrong about that.

Eric: It’s a thought provoking question. I guess the question is, how does Medicare work with the Medicare Advantage plans. I want to go back to Rotten Tomatoes. Where do you draw the line? Is it 80 percent or above you take? In my house, my kids go for anything under 20.

Patti: Oh, boy. Back to the five star plans.

Eric: I guess to your point, I always feel like these things are done with the intent to inform the consumer. So much regulation and thing is all about improving standards, improving quality, but also, making sure you’re communicating that in an understandable way, because we’re talking about programs that affect tens of millions of people.

I would hope that would be the spirit. Perhaps there’s some nefarious intents, with someone cloaked in a secret room. I don’t know. It’s a great question.

Patti: We always talk about, everybody’s worried about is Social Security going to run out? What many people don’t realize is it’s not really Social Security that is the issue for the government. It is the cost of Medicare and these entitlement programs.

Eric: You did it again.

Patti: Oh, here we go.

Eric: Here it goes. Every time we do this, some kind of new topic comes up for future podcast, so stay tuned. Who knows, maybe, you never what you’re going to get here on the Patti Brennan Show.

Patti: Absolutely, yes, and we’re talking to talk about the new tax law – the potential new tax law – because there’s a lot of stuff that people listening can and should be thinking about before the end of this year. That’s our next podcast. That’s going to be fun.

Eric: Oh, yeah, I’m looking forward to it, but I might have to lay on the couch and take five before we come back to that. That’s a big topic to be able to talk about.

Patti: Absolutely. All right, Eric, well, thank you so much. This has been fun, as always, enlightening, hopefully, for everybody listening and watching today. I can’t thank you all enough for always tuning in. It’s just been amazing.

I hope it is fun for you, it is different. We try to take these very dense subjects and hopefully lighten them up a little bit for you, and give you really actionable steps. Again, just to refresh your memory, go onto our website.

All of this information is on our website in the podcast section. White paper, all of these enrollment periods, what you can do, what you can’t do, and some of the landmines that we’ve talked about today. Thank you so much for taking the time.

We love having you here. We love the feedback that you’ve been giving us. Thank you for sharing the podcast. It’s been unbelievable. I hate to use the word, but it’s become viral. Eric, thank you, as always. It’s just fun. We spend a lot of time in advance of these podcasts thinking about what we want to share.

You do so much work on them, and I really am grateful, so thank you.

Eric: It’s the highlight of my day, always.

Patti: Yes. That’s it for today’s show. Again, go to our website, keyfinancialinc.com. If you have questions, give us a call, send us an email. We are here for you. Thank you so much. I hope you all have a great and healthy day.

Ep81: Issues to Consider When Moving Out of State

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked, but should be asked, question). There are many reasons people choose to move to another state. The hot real estate market of 2021 may have accelerated the issue for many considering retirement or job change. Before making this decision, there are several issues to consider – many involving serious potential tax consequences. Patti guides the listener through a checklist of important items to keep in mind before making the big move, to better understand the rules when establishing state residency to fight potential tax audits.

Patti Brennan: Hi, everybody, welcome to the “Patti Brennan Show.” This show is for those of you who want to protect, grow, and use your assets to live your very best lives. This is part of our ongoing “Ask Patti Brennan” series.

People ask questions and a lot of times we get the same types of questions. Today, we’re going to talk about, “I’m thinking about moving to a different state. What issues should I consider before doing so?”

You may be a remote worker and you might be tired of paying the high rents in the city. You may be retiring and want to move to a warm-weather state. What are some of the things that you might want to keep in mind as you consider moving to a different state?

So, first of all, it’s really important for you to know that you can only have legal domicile in one state. A lot of people are doing this because they want to move out of the higher tax states.

Let me be the first one to tell you, if you haven’t heard it before, a lot of the higher tax states are going after people who are moving out to make sure that it’s legit, to make sure that you are actually spending more than six months in the new state.

So you’ve got to set this up so that if you are claiming to be living in a state like Florida for example, that you can prove that you are actually doing so. That’s especially true if you’re keeping two homes. So, how do you go about doing that? Well, first of all, again, understand the six-month and one-day rule. You also want to set yourself up so that it is completely defensible.

For example, change your driver’s license, your voter registration, your passport, your doctors, that’s probably a really sensitive area and believe me, some of these higher-tax states are asking the question, “Hmm, where is your doctor? Are you really living in Florida, for example? Or are you just setting it up so that you don’t have to pay our state taxes?”

Also, you want to make sure that the second state, or your primary state that you’re moving from, can’t claim residency. You can be domiciled in another state but you may have to file two tax returns if, for example, you’re working part-time in one state and part-time in the other.

In addition to changing your driver’s license and doing the standard things, tell UPS, tell the Post Office, the IRS, have everything mailed to the new state. Other examples would be Medicare, Social Security office. If you’re a veteran, notify the VA.

Everybody that you do business with, every piece of mail that you receive, notify those people that you are now living in this new state. Again, I’ve mentioned the doctors’ offices, that’s kind of a very personal thing. Also, hairdressers, believe it or not.

These states are getting very creative. They’ll look into your EZ Pass records and see, “Gee, are you really driving back and forth? How much time are you spending in one state versus the other?” Airline tickets, I mean it’s just really incredible what they’re doing to go after that tax money.

In addition to understanding how your actions might develop the defense, if you will, against a state coming after you for taxes in their state, you really want to also consider, what’s some of the programs that you might be giving up? For example, if you have a special needs child, or you’re using some of the social benefits in your state.

States will vary tremendously, so please understand what you may be giving up or may be getting in various states. Again, the income taxes, if you’re torn between one state or another, understand the income tax ramifications, one versus the other.

For example, in Pennsylvania, 401(k) distributions, IRA distributions are not taxed on a state level whereas they are for people who, for example, move to Delaware. That’s an important consideration because, especially when you’re retired and start receiving that income, that can add up to a lot of money.

In addition to that, what are some of the creditor protections that one state might provide versus another? Again, very important for people who work in certain professions. If your move is tax-motivated, be very careful about how that is construed. You may have to file taxes in both states and there’s some crediting that might occur.

If you are paying for your own move, unreimbursed moving expenses in certain situations will be tax deductible so definitely keep that in mind. Look at your state withholding and your federal withholding as well. What’s that going to look like in your new residence, in your domicile, if you will?

Here’s a question that I often get that is kind of complicated, “What happens if you’re married? You file a joint return. One spouse is living in one state. The other spouse is living in another because they may have to work there? How does that work?”

Well, again, it depends on the state. Some states will require that, even though you may be filing a joint tax return on a federal basis, you would have to file separate returns on a state level, but not all.

When you move to the new state and declare your domicile, I would highly recommend you meet with an estate planning attorney to review your estate planning documents. While it may not be necessary to make any changes, you may want to do that anyway because there are state-specific rules that may apply or not apply anymore.

So that would be number one. Number two, if you are on Obamacare or you’re on Medicare, the supplemental plans that are out there are based on where you live so it is important to understand that a move will affect or can affect your medical benefits. Just know it going in, and understand it, and make your decisions accordingly.

There’s a lot of things to take into consideration, the cost of moving, the property taxes may be higher. There may not be an income tax, but the property taxes are ridiculous.

Also, understand the concept of homesteading where you get a lower property tax as long as it’s your primary residence. When you pull all of this together, you’ll have a very clear understanding of the implication of moving to, again, a state like Florida versus staying in Pennsylvania or New Jersey.

Staying in California, California is another state that’s getting very aggressive going after people who are moving to Texas, for example. It’s very interesting to see a lot of the tech companies and people who work in that area, in the San Francisco area, are moving to Austin because it is a very tax-friendly state and a very tax-friendly city.

So, lots of considerations as well as quality of life. Where do you want to live? At the end of the day, it’s your life. It’s quality of life. Where’s your family, where are your friends, what’s important to you? We can figure out the money part. Just understand the implications, and plan accordingly.

Thank you so much for tuning in today. I hope this was helpful. If you have any questions, please go to our website. Write in your questions. We are here to help you in any way we can. Thank you so much. Have a great day.

Ep80: Alzheimer’s Disease – America’s Healthcare Crisis

About This Episode

Patti welcomes Dr. Jason Karlawish, co-director of the Penn Memory Center, and author of “The Problem of Alzheimer’s – How Science, Culture, and Politics Turned a Rare Disease into a Crisis and What We Can Do About It”. They define the difference between mild cognitive impairment, dementia, and Alzheimer’s and address the stigma associated with this disease. America is one of the few western global democracies that has not formulated a national healthcare plan to cover the rising costs associated with caring for individuals suffering from this disease. Dr. Karlawish identifies the signs to look for in diagnosing this disease and reveals how recent biomedical breakthroughs can spur our healthcare system from failing these patients to saving them.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” This show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today, we’re going to be having an important conversation about a disease that affects all of us. It’s Alzheimer’s. It’s the impact of Alzheimer’s not just on the individual themselves but the family and society as a whole and what can we do to arrest this awful disease once and for all.

Joining me today is Dr. Jason Karlawish. You guys, I am so excited to have Jason with us. This is just such an honor. I will tell you before we started airing, I said, “Jason, I will tell you I’m really intimidated. You’re like a superstar in this field.”

“Really, I bow to you.” Jason has written an amazing book. It’s called “The Problem of Alzheimer’s – How Science, Culture, and Politics Turned a Rare Disease Into a Crisis and What We Can Do About It.” That’s what I loved about this book. I read it over the weekend and last night.

If you’re watching this, you’re going to see that I have the book here with Post It notes all throughout. There was such good information, dating back, going through the history of the disease, the starts, and the stops, what we’ve discovered, things that don’t work, and maybe a few things that could. Jason, thank you so much for joining us today.

Dr. Jason Karlawish: You’re so welcome, Patti. It’s a pleasure to be on the show.

Patti: By the way, everybody, you should hear Jason’s pedigree. He’s the professor of Medicine, Medical Ethics, and Health Policy and Neurology – Jason, I’m not sure how you’re doing all this, but it’s amazing – at University of Pennsylvania. He’s also co-director of the Penn Memory Center. You can’t get a better expert on this disease than Dr. Jason Karlawish.

Dr. Karlawish: Thank you.

Patti: With that, let’s just start from the beginning. The question I have, that a lot of people have, is “What’s the difference between mild memory loss…” I understand that the first symptom of Alzheimer’s is memory loss.

I don’t know about anybody listening to the show, but there are a lot of times when I’m wondering, “Am I beginning to lose it here?” How do we differentiate between mild cognitive impairment, MCI, versus dementia versus Alzheimer’s?

Dr. Karlawish: Let’s unpack that. Great question. Let’s start with the most basic question that is probably the most common question. What’s the difference between Alzheimer’s disease and dementia?

Simply put, dementia describes someone who has developed disabling cognitive impairments. They have trouble with memory, attention, concentration, multitasking, and those problems with those cognitive abilities are causing them to have disabilities, meaning troubles doing their daily tasks.

Early on, those troubles are things like managing money, deciding what restaurant to go to, traveling to the restaurant, getting the menu, picking what you want to order, and then paying the bill and calculating the tip. All those are cognitively intense tasks, and someone with dementia has trouble doing them. They need someone else to help them. That’s dementia, disabling cognitive impairments.

Alzheimer’s disease is a disease of the brain that causes dementia. It’s not the only disease of the brain that causes dementia. Another common disease of the brain that causes dementia is a disease called Lewy body disease. That’s what Robin Williams, the comic actor, had. He had Lewy body disease.

There’s another disease called frontotemporal lobar degeneration. Very different disease but in the end, the common problem, if you will, is dementia. That’s the difference between Alzheimer’s disease and dementia.

Alzheimer’s, a disease that causes dementia. You threw in mild cognitive impairment. What’s that? In the book, I recount the history of mild cognitive impairment. It’s a relatively recent concept. It’s only about 20 years old when that concept was premiered in the medical literature.

What mild cognitive impairment describes is an individual who has a cognitive impairment that’s causing inefficiencies in daily activities. They take longer to do things that they used to do, if you will, quicker. They may make a mistake, but then they catch it. That’s MCI. Just like dementia, a host of different diseases can cause mild cognitive impairment. One of those diseases is Alzheimer’s disease.

One of the points I make in the book is, once upon a time, you had to have dementia to be diagnosed with Alzheimer’s. About the turn of the century, the advances in this idea of mild cognitive impairment began to allow someone to be diagnosed with Alzheimer’s before they had dementia when they only had mild cognitive impairment.

Again, if you’ve got a label of mild cognitive impairment, that doesn’t mean that you have Alzheimer’s disease. The next question is, “What’s causing my mild cognitive impairment?” It might be Alzheimer’s. It might be another disease. It might frankly be some of the extremes of aging to go with a host of other things that can impair cognition.

MCI needs a workup if you will. That’s the kind of thing we do when we see folks at the memory center here at the University of Pennsylvania.

Patti: Do you find that MCI automatically progresses? Does it always get worse, or would it stabilize?

Dr. Karlawish: No, it depends on the cause. In well-done studies of persons with mild cognitive impairment, depending on how they define it, etc., over time, depending on issues of definition and whatnot, about half develop further cognitive problems and develop dementia. That’s because they have a disease.

The other half doesn’t really change much. Some even revert. Again, it reflects that these are heterogeneous causes causing these problems. If there’s one thing I would say to your listeners, if you’re told somebody has dementia, it doesn’t mean they have Alzheimer’s. It means they have a disease.

It might be Alzheimer’s. It might be Lewy body disease. It might be a vascular disease. Same thing with MCI. They may have a disease, but also given the subtleties of MCI, they may not have a disease. All the more reason to get those conditions worked up and not just simply go with the label.

Patti: Jason, when you use the words worked up, how exactly is that done? One of the things that I didn’t share with you is that, in my former life, I used to be an intensive care nurse. What we learned is that the only time that you really have a definitive diagnosis is on autopsy.

Dr. Karlawish: A definitive diagnosis of Alzheimer’s, you’re right. Once upon a time and for a long time, that was how you could just tell someone that the cause of their dementia was Alzheimer’s, which of course is somewhat ghoulish, because what you’re essentially saying to the patient is, “Until you die, I won’t be able to tell you definitively whether you have Alzheimer’s or not,” which means I won’t be able to tell you, hence the ghoulish aspect of it.

That’s because it’s not until you get the brain of the individual and slice it up and look under the microscope can you see the characteristic pathologies that are seen with Alzheimer’s. The advances though that have occurred – and I talk about this in the book – that is rather spectacular is that we can now visualize those pathologies in a living human being.

We can do brain scans, PET scans in particular, and also analyses of the spinal fluid that can visualize the pathologies that cause someone to develop dementia. That’s a set of technologies that are available now but variably available for reasons largely related to the quality or lack of quality of our healthcare system when it comes to the diagnosis and care of older adults with cognitive problems.

Patti: I would imagine that a lot of people would be reticent to get that diagnosis. I would think that they would be almost afraid, like, “Oh my goodness, I’m going to be labeled as having dementia. People are going to treat me differently.”

Dr. Karlawish: That’s exactly right.

Patti: What are your thoughts on that? Are there advantages, or is this thing just going to progress? It is what it is. You’re going to have to figure it out, right?

Dr. Karlawish: There are two things that we’re talking about here, really. One of them is we are talking about stigma, stigma meaning a mark on someone. When other people know that mark, they treat that person differently. They separate from them. They distance from them. They stereotype them. Certainly, if there’s any one disease that enjoys, sadly high octane stigma, it’s Alzheimer’s disease.

The reason why we care about stigma are many. Number one, the well-being of the person who’s labeled. But number two, the issue you just raised is when a disease is haunted by stigma, people are reluctant to find out if they have the disease. They avoid the places where the disease is diagnosed. That’s understandable. Stigma creates a sense of revulsion, distancing, etc.

Stigma’s a very real problem in Alzheimer’s because you’ve got patients, frankly, people out there who have problems but just won’t get them worked up and refuse to have it worked up because of stigma. That’s one problem right there.

Then the question is, how do we combat stigma? What can we do to do that? One way we do that is we have conversations like this. We raise awareness in the community. Read my book, dare I say. The more something is discussed and talked about, the less stigmatizing it is.

Having said that, though, there are real advantages to getting a diagnosis and to getting a diagnosis early. I think this is why you and I have come together in fact because some of the earliest problems with cognitive impairment, they’re not troubles with bathing, dressing, grooming, and feeding, late-stage problems.

They’re troubles doing very sophisticated cognitive tasks. What’s one of those tasks? Managing your money…

Patti: You bet you.

Dr. Karlawish: …paying your bills, all those things that require – what we call in my field – higher cortical function. Early on in this disease, they are impaired. The tragedy of patients who don’t get a diagnosis early on, they have these impairments. They start making mistakes. They get defrauded. They lose money. It just becomes this disaster by the time they finally get worked up.

Patti: Agreed. What I understand with Alzheimer’s is, especially in the beginning, you can have good days and not-so-good days. That makes it even worse. It makes it even more difficult. If you’re married to somebody, they’re just not having a good day. Then you find out three months later that they made an investment in some random offshore thing, and all of your money is gone.

Those are very real stories. People need to understand that, the awareness. Just face these things because there are things that you can do to protect yourselves and help the person.

Dr. Karlawish: Even if there’s not a treatment, and there is a treatment out there now, which we can talk about. I think it’s a very debatable and controversial treatment. Even before the FDA approved that drug, which will soon be available perhaps, even before that, there were real concrete things you can do. In the book, I talk about this.

The word I use is planning. They say, “What do you mean, planning? Whether I get on a ventilator or not, get CPR?” No, no. What I’m talking about is planning. I’ll speak personally.

If I had cognitive problems, let’s say I had MCI, I would want to have a plan in place that someone’s watching over how things are going with my money, emphasis on the watching over, not managing it, not joint on all the accounts so they can defraud me but able to watch over and say, “You know what? Actually, you already paid that bill.”

Or, “You’ve bought that thing twice,” or, “Wait a minute. What’s this purchase, a 20-year maturing security and you’re 90 years old? [laughs] You’re not going to see that mature in time, probably. So let’s have a conversation.”

The same thing around driving, you can pick a number of very important activities in daily life that you want a plan in place to monitor. If things are detected, someone can step in and help who you trust.

If you wait for a fire, you know you’re going to burn some part of the house down. Instead, you can put in alarms and other systems that the place might not catch on fire. If it does, it’ll get taken care of very quickly.

That’s the model I think that has existed. Unfortunately, though, most family members don’t have access to that kind of education, skill-building, because of the limitations of our healthcare system.

Patti: It is so interesting because, as you were talking, I was thinking, “Boy, I hope my colleagues are listening to this podcast. I hope the financial advisers are out there.”

Dr. Karlawish: They should because they’re on the frontline.

Patti: Exactly, because we know our clients. We know what’s normal for them and what’s not normal. I will tell you it has come up. Someone will come into me and say, “Patti, I was just speaking with so and so. Something just didn’t seem right.”

Or, they’ve been asking for more distributions from their portfolio than ever before, or we’ll get a call from the CPA, and the CPA will say, “This person has not filed their taxes. They’re not giving me the information. Something’s not right.” It just raises that red flag to dig a little deeper.

Dr. Karlawish: Let me speak personally, certainly, in my clinic. I recount them in my book, in my practice, but frankly, I’m going to be candid in my own family. I have witnessed just that the earliest signs and symptoms were things that the tax accountant and the investment manager were picking up.

I’ll tell you my own personal story. Frankly, I finally called those folks. They’re like, “Yeah, no, I’ve noticed stuff.” I was on top of it early on because it’s my gig. It’s what I do.

Patti: It’s more than a gig.

Dr. Karlawish: But I thought to myself, “How many other of your clients are doing this? You’re just watching this happen.” I thought, “Wow.”

Patti: It’s very interesting what we do as a practice. Whenever we take on a client, the first thing that I do is have them sign a form that gives us permission to speak with someone in their family. We don’t necessarily give them any personal information, etc., but a trusted person within their family if we notice something isn’t quite right.

Dr. Karlawish: That is good practice.

Patti: I want to get it up front while they’re healthy, while they understand, and they’re in agreement that that’s probably the best thing to do. It’s really we’re just looking out for them.

We’re looking out for their family whether it’d be financial damage or otherwise. As you said, some of these people should not be driving a car. That’s really important for them to know that we care more about them than their money.

Dr. Karlawish: The issue here, especially with this disease, is from diagnosis to death, it can last as long as 10 years, very variable. But let’s set that aside. If we’re talking about a chronic disease, we’re talking about a disease which, early on, persons need help. As they get more disabled, they need more help.

In America, that means help that you get because you paid for it. The one thing you don’t want to do is go into your retirement with a pile of cash, lose it because of fraud and other bad investments, and then go into developing worsening cognitive problems because then it’s either the family or the state that has to step in and pay for the stuff that you could have paid for.

That’s why this disease ramifies across families and into society because of the cost of the long-term care paid for mostly now by American families, but I think something that also needs to be addressed on a policy level, of course.

Patti: It was so interesting that one story that you told in the book about the gentleman whose wife was diagnosed with Alzheimer’s. He met with his advisers. His advisers basically gave him three alternatives.

Number one, you could put all of your assets into an irrevocable trust and lose control of that money forever. You’re going to have to ask for a dollar to buy a newspaper. You can’t do any of that yourself. You’re going to have to ask a separate person, an independent person. It’s an irrevocable loss of control. That was option number one.

Option number two was, hey, you could get a divorce. Divorce your spouse. That person will receive some of the assets and then eventually go through it, and then they will qualify for Medicaid.

By the way, that first option, which is the irrevocable trust, is a way to try to qualify for Medicaid. For anybody listening to this podcast, please understand the rules of your state and the fact that there is typically a five-year look back if you do attempt to pauperize yourself in this fashion.

I will tell you, I’m going to come clean with all of you listening, I’m not a big fan of those things at all. Both of these things have a little bit of a moral ramification. It just walks that fine line. It’s typically not in your best interest to do either as well. Option one, option two. Option three, of course, is just pay as you go and hope you don’t run out of money.

Dr. Karlawish: Just keep on paying until you hope you don’t run out of money. That’s what he chose to do, that guy. I remember him well, a husband. They managed to get through it with a lot of assets lost. In fact, she was an early onset case, that is to say, age of onset was before the age of 65, which is uncommon.

That family’s faced a lot of strains related to loss of income for retirement as well as for support of adult children beginning careers, education, etc. This is why the disease ramifies into the American family because you’ve got savings that you need to do things like pay for your well-being in retirement, support the education of other family members, etc.

When that’s hoovered up by the cost of long-term care, which can get into triple thousand digits depending on the severity of disability, for the average American family, that’s a cost that can be, frankly, bankrupting or at least financially destabilizing.

Again, most Western nations, Germany, etc., have a long-term care social insurance program to minimize that risk upon the well-being of the families. We don’t have that in this country. In this country, you just pay until you go, until you qualify for Medicaid, meaning you meet poverty thresholds. Then the state will step in and help out.

I don’t think that that’s acceptable. That’s putting the American family in the front line of a risk that they shouldn’t face with their finances and well-being.

Patti: It’s also really short-sighted too.

Dr. Karlawish: As a society.

Patti: You think about the cost of this disease and the impact on our economy and the impact on those families. You think, “Geez, if we could just cover it, the impact wouldn’t be nearly as great.”

Dr. Karlawish: Exactly. That conversation is lost in policy-making circles. I totally agree. Long-term care social insurance will be expensive. It will require an additional payroll tax. Absolutely. The problem right now is that the American family is paying off the books.

I have family members who will tell you, “I cut back on work. I left the workforce. I didn’t advance as far as I could have at work because I had to take care of my mother, my father, my husband.” Even folks who are retired will say, “Well, less assets to transfer to the next generation because we’re spending on this.”

It’s a hidden cost in the American economy. The standard complaint, oftentimes from one side of the aisle, is this will require raising taxes and cost billions and billions of dollars. I’m like we’re already spending the billions of dollars it’s costing our economy in terms of efficiency and productivity.

Why don’t we just be honest and face the problem like adults do, and say we’re going to have to ban together, put in a payroll tax, raise the funds, and provide that cushion of long-term care social insurance for the American family who needs it? Germany does it. Japan does it. France does it. For some reason, we just don’t want to do it as a country.

Patti: It’s a very effective solution because it works. When you have social insurance, because private insurance, as you well know, is also out there, it is really, really expensive.

Most people can’t afford it and/or just when they get to the point where they’re ready to make a claim in their 70s or their 80s, the cost of it is skyrocketing, and they can’t afford to make the premium payments, so it lapses. That’s not working.

Dr. Karlawish: Most of those policies only kick in when you’re really disabled. I look at some of the policies people have, and they’re like, “Oh, look at this. I’m covered.”

I’m like, “Well, yeah, but it only really is going to pay for a home health aide to help with bathing, dressing, grooming, and feeding, which is the last few years of the disease. Meanwhile, you’ve got about five or six years of needing supervision, an adult day activity program, etc., and none of those costs are covered by this policy.” A lot of policies are a lot of hats but not much cattle.

Patti: It’s the question of is it hands-on care or standby care.

Dr. Karlawish: It’s the standby care that you really need. For many of my family members, the care that they need until someone really as having trouble with mobility is I need someone around during the day. I can’t be there all the time.

That person’s going to be there to help that person live a day that’s safe, social, and engaged. That’s a very different role than someone who’s going to bathe, dress, groom, feed, and toilet someone.

Families struggle to find that kind of person. Again, I could tell you personally my family’s struggled to find someone. We finally did. The system isn’t in place to access that kind of person. I’m just again fortunate, given my expertise, that I knew what to look for and how to find it. I really pity the average American family who has to struggle with this disease.

Patti: I do too. It’s really hard to watch. I think about the isolation. That stigma really carries on for the whole family, the spouse, etc. They become that much more isolated. A, they have to be there all the time to take care of that person, and other people aren’t coming around as often.

So difficult, so very, very difficult. I really am interested to learn more about the concept of social insurance, and again, these problems – I’m going to be casual here – they drive me nuts because there is a solution. Come on.

We were talking about this again before we came on broadcast, and it’s so interesting with COVID 19. You throw enough money at a problem. You can solve it. Look at where we are today.

I know that Alzheimer’s is a much more complicated disease. If we come together as a nation and say, “OK, we don’t know whether or not we’re going to be directly affected by this, but if we are, there’s going to be other Americans who are going to help us in the form of this social insurance that will help us provide the care that we need.”

Dr. Karlawish: COVID was a wake-up call that vast problems that ramify across society needs a united social approach. They’re not problems that are solved by the grit of the individual. The grit of the individual is needed, but it’s only part of the solution. You’re right.

What are these problems? The word I use to describe them is they’re humanitarian problems. They cut across disciplines, and they ramify outside of just the medical space. You have to approach humanitarian problems united and with a kind of top-down all-hands-on-deck approach. We did it with COVID, more or less. There were moments there where things got a little weird.

Dr. Karlawish: We can do it with Alzheimer’s disease. That is to say dementia. We just have to be united in that. I have hope. America has an Alzheimer’s plan. It’s not as well known unfortunately as it should be, but it has resulted in some progress, particularly in better understanding the biology of the disease and developing diagnostics and treatments.

Progress has been a little uneven on care, but it’s better than what the alternative was, which was zero progress in that space.

Patti: You’ve mentioned this Alzheimer’s plan a couple of times. What exactly is it? I’m not familiar with it.

Dr. Karlawish: Most Americans aren’t, which is unfortunate because I think it leads to this sense of desperation that we’re not doing anything. It’s one of the variables that, unfortunately, led to the FDA decision to approve aducanumab, namely this sense of desperation.

Around about 2011 or so, President Obama signed into law the National Alzheimer’s Project Act. In the book, I recount the really brilliant efforts by the Alzheimer’s Association to get this to come to law.

One of the strategic things though that was done was to not make it a big public blowout, to not have the president make a public announcement to a bicameral meeting of the Congress that we’re going to take on Alzheimer’s. A lot of that had to do with it’s so hard to unite America and Washington around a problem, especially if they have to spend money, that the better way to do it was to do it quietly.

In summary, when Obama signed that into law to create the National Alzheimer’s Project Act, he did it somewhere in Hawaii just about ready to go on his week-long vacation. You can’t even find a photograph of him signing that into law.

Anyway, what the Project Act calls for is all federal agencies, departments that in some way involve the lives of persons with dementia need to unite together and put together an Alzheimer’s plan. Every year, we revisit that plan as a nation. It’s beginning to create some coherence around our approach to the disease.

I’ll wrap up with the most impressive thing that’s occurred was substantial increases in the NIH funding for Alzheimer’s research, such that my colleagues and I now enjoy the ability to get our projects funded and also to train the next generation of researchers and clinicians to take on this problem.

Compared to the way things were five, six years ago, I’m very optimistic. It’s all made possible by this National Alzheimer’s Project Act, which again as you point out, I’m going to be self-promoting, but until people read my book, most people don’t know about it because it just was never promoted.

Patti: It is so interesting. I did read about it in the book, and I was thinking, “Wow, where have I been? I never knew that that existed.” I feel like it’s a shame that it wasn’t publicized. Again, it’s only through transparency that we take away some of the stigma associated with the disease. It’s out there. Let’s not pretend that it isn’t out there. Let’s quantify the cost.

That’s also part of this, Jason. We have to make it crystal clear how much money our economy is losing because of this disease. It is billions and billions of dollars. Again, the most recent example is COVID. There isn’t one corporation. There isn’t even one agency.

The University of Pennsylvania is not going to be able to solve this problem by itself. We need just a massive amount of energy, intellect, and money to attack this head-on.

Dr. Karlawish: One of the problems about the cost of Alzheimer’s disease, which is really better said as the cost of dementia to America is that it engages the politics of welfare because the way that you get to the triple-digit billion dollars per year cost of this disease is not the cost to the healthcare system, meaning the cost of drugs, scans, hospital visits, etc.

The way you get to the triple-digit billion dollars annual cost is if you take the work of a caregiver a daughter, a wife, a husband, occasionally a son, and you say, “How many hours a week did you spend giving care to your relative?” They give you that number. Then you say, “If that was a job, how much would you be paid to do it?”

Once you assign a wage to the labor of caregiving and you add up across all the caregivers doing caregiving, that’s the triple-digit billion dollar figure people talk about. The problem, of course, is that that engages the politics of welfare because that’s saying that the work of a caregiver is work that ought to be compensated and counted.

In America, there are some real differences about that. There are some people who think, “That’s just what families should do. That’s a family problem. We’re not going to deal with that problem,” or you have to be poor enough, and then we’ll finally step in and help you out to do that problem.

As long as that’s the conversation that you have, you’re unable to have an honest conversation of American workers are less productive and/or the American family’s savings are being taken up by this disease because you’re caught up in people saying, “That’s welfare issues. Welfare is socialism,” and all of the things.

You find yourself lost in this bizarre political conversation where helping people with Alzheimer’s and their families threatens socialism to America. You’re like, “Wait a minute. How did we arrive at this bizarre conversation that our liberty will be taken away by caring for people with dementia? Our liberty’s being taken away by Alzheimer’s disease, not by trying to help them.”

Yet socialism is this thing that we have to fear. I’m like, “This has nothing to do with socialism.” Yet that’s the conversation that we have. Until we break that rhetorical logjam…It’s almost darkly comic political conversation.

Patti: It’s weird. That’s what it is. I cannot even believe that people could frame it in that way.

Dr. Karlawish: That’s been the rhetoric though. The rhetoric since the ’80s was…Actually, much of the rhetoric around expanding public welfare was sidetracked into conversations about socialism and the threats of a socialist takeover.

The American Medical Association opposed Medicare. Many politicians backed this because they feared if you have Medicare, that Medicare will lead to a Communist takeover of America. Ronald Reagan, at the time he was an actor in the 1960s, did a PSA record – at that time, it was actually a record – in a project that the AMA sponsored called Operation Coffee Cup.

I recount in the book how then actor Reagan was warning the AMA wives if Congress passes what would come to be called Medicare, that’s going to lead to socialist takeover of America. You look at this. You have to laugh because it was bizarre.

Yet that was the conversation, and yet that same kind of conversation continues today. The opposition to many of the infrastructure improvements that are proposed in the infrastructure package is this will be socialism. I just shrug my shoulders and say, “But who’s going to take care of these problems?” These are big problems. They can’t be left to the American family to solve.

Patti: It is so, so interesting. I’ve got your book in front of me, Jason. I’m reminded of this comparison that you made with solving polio and other comparisons. I’ll just read this.

“We could basically do that for the Alzheimer’s, colleagues chide me. Build more memory centers, nursing homes, and adult day activity centers. Noodle our way to better team-based care. Set our hospital cell phones to vibrate at night, or they insist, ‘We could just cure this damn disease.'”

Dr. Karlawish: They go to polio. They say, “Look at that. With polio, we could have built more iron lungs and everything else. Instead, we discovered the vaccine. Polio became a thing of the past,” assuming, of course, someone who has the polio vaccine hidden in a vault doesn’t release it and people get vaccinated, witness current problems with COVID.

Anyway, that we’re going to drug our way out of this problem, make it like polio, a disease of the past, the problem with that is every bit of the science is showing us that the many diseases that cause dementia are just that. They’re many different diseases.

Just like there are many routes to developing cancer depending on the organ, we certainly have made progress in cancer and heart disease with therapies. The notion that we’ll never have any heart disease or cancer is just not rational policymaking to say, “That’s how we’ll solve the problem of cancer and heart disease.”

That’s the same thing, I think, with this disease. We absolutely should expect progress in developing effective therapeutics such that some people don’t experience disabling dementia. Others experience it slower. But sadly, some still don’t respond to the therapies. You can’t get them, whatever it may be. That’s how we have to think about this disease.

The idea of curing Alzheimer’s, it’s rhetorically powerful. It motivates people. There’s no question, but I think we have to have a more rational approach that says, “How can we more effectively treat this disease?” Drugs are part of the solution, but they are not the only part of the solution.

Patti: Since you brought up the drugs, I’d love to hear what you think about Biogen’s drug and the controversy that is now surrounding it. What do you think?

Dr. Karlawish: I think that the drug should still be available but only after a patient signs an informed consent form to enroll in a research study to finally establish, “Does this drug actually slow the progression of Alzheimer’s disease?”
Unfortunately, FDA didn’t see it that way and decided that, based on the data Biogen presented them, data that has yet to be published, that the FDA would grant Biogen the ability to sell the drug, although still requiring “a confirmatory study” to establish whether the drug in fact benefits patients.

They did this because they wanted the drug available because patients are desperate. Nothing else is available. I get the argument, but I think most in the field were a little aghast when they saw the FDA’s decision because we were really making progress with this drug and other drugs to establish whether drugs like aducanumab change the natural history of the disease.

FDA went ahead and jumped the line and said, “Let’s make it available but continue doing studies of it.” Try and do a study of a drug like that when it’s available commercially is a little difficult to do, plus it sets now an evidence bar that is lower for other drugs out there.
Many of us in the field were very frustrated. We really were making progress with drug discovery. Aducanumab actually may be effective, but the data that were out there don’t really show that to the level that I think were necessary to prescribe it.

The FDA didn’t see it that way, and now we have this mess. A drug is available with questionable data. At the same time, we still need to do studies to establish whether that drug is effective as well as other drugs that are like it. I think the field finds this an extremely frustrating situation.

Patti: If I hear you right, what I’m hearing is that, because it is available to do a study, one group having the placebo and another group getting the drug, or however you’re running these studies, you can’t do it as effectively. Is that what you’re saying?

Dr. Karlawish: The patients with Alzheimer’s shouldn’t have to bear this cross, which is, “If you qualify for the drug based on severity, do you want to get the drug clinically, or would you want to enroll in a clinical trial that will help other people, and you may or may not get it?” I think making people make that choice is bizarre.

Patti: I see.

Dr. Karlawish: The other problem, though, is you’re putting out a drug that the FDA admits the evidence is, at best, provocative that it may actually alter disease course. FDA’s argument was, “We can lower the standard of evidence because there’s a regulatory mechanism in place for serious and life-threatening diseases, Alzheimer’s is one of them, that allows a drug to be put into practice on the basis of a weaker standard of evidence.”

I think many in the field felt the evidence here didn’t even rise to that. More research was needed. I know you say, “Well, of course, a physician at the University of Pennsylvania would say more research is needed. That’s what you guys and gals do.”

My push back is no, no, no, I know what this disease is like. I have this disease going on right now in my family. Yet, for a big, vast, large as this, as complicated as it is, it was premature to put this drug out into the marketplace. It needed more study.

It’s going to be difficult to do that study, and the FDA’s new evidentiary standard threatens that drugs will be put into practice on the basis of evidence that can’t let me confidently say to a patient, “This drug is worth its risks and its worth its costs.” For many in the field, it’s an extremely frustrating situation that we find ourselves in.

Patti: Is it something that can be undone?

Dr. Karlawish: Future drugs, we’ll see. There’s a drug, for example, that Eli Lilly has called Donanemab. Donanemab is a promising drug. We were all very excited about the data that were published in the “New England Journal of Medicine” in May of 2021.

Now, FDA’s lowered the evidentiary standard. We’re like, “Wait a minute. Does this mean you’re not going to do the confirmatory trial we all really want to see, or are you going to let the trial happen, please?” That’s where, I think, the field’s a little worried right now.

Aducanumab, Donanemab, and Lecanemab, all these drugs that are showing promising signals are getting out there too damn quickly. That’s a real problem to be able to study them and tell patients they’re effective and to tell society they’re worth the cost. These drugs are expensive, and a lot of people could take them.

Patti: As I recall, I could be wrong on this Jason, but isn’t it true that when Biogen first went to the FDA, when they did it at lower doses, and the FDA did not approve it. Then, later on, they bumped up the doses. They were trying to fool around with that, and that’s when the FDA finally said, “OK, you can start.”

Dr. Karlawish: The relationship between FDA and Biogen around this drug is to be better understood. In fact, Janet Woodcock, the acting commissioner of the FDA has called for an Office of the Inspector General investigation to look at, more closely, the relationship between FDA employees and Biogen. We’ll wait to see what that investigation shows.

The fact that she had to call for that raises real concerns about the nature of the relationship that FDA officials had with the company. They were close, but maybe too close is the concern.

Bottom line, the studies that Biogen did that led up to the data that are available had a lot of decisions made that were more driven by business than science – move things along quickly, get things done without spending a lot of money. I get the perspective of a company. I can’t fault a company for doing what companies do.

On the other hand, it didn’t serve the science as well as it could have. You’re right, one of the issues was they leaped into phase III without really good data around dosing. They had to amend the protocol to change dosing regimens in the middle of the phase III studies, introducing variance and noise in the data.

The other thing they did was they threw a futility analysis into the study. You say, “Well, what the heck is that?” Basically, a futility analysis lets you decide whether there’s no chance this study will work.

If that’s the case, you just stop it and say, “I’m not going to keep this study going. It costs me money. Why should I spend money on something that has no chance of working within certain levels of probability based on how the analyses are conducted?”

Biogen did that. In fact, they did the futility analyses. The futility analyses said, “It’s not going to work, likely,” so they shut the study down. More data rolls in. They analyze that data. Guess what? It works in one study but not the other. What you’re left with is like a forehead slap of, “This didn’t have to happen. These were business decisions.”

I’m pro drug. I’m alive because of drugs. Early in my life, I had a very bad illness, and I was saved. I have family members who are alive because of drugs, who are living well because of them. It’s not about being pro or anti pharma. It’s about being smart about how we use our pharma technology and businesses to develop drugs.

I think there’s a lot of concern with the aducanumab decision that something’s going awry at the FDA, and they’re making decisions that no longer serve public health.

Patti: In addition, or aside from the issue of drug treatments, what else can be done to improve the lives of people who have been diagnosed with dementia and/or Alzheimer’s?

Dr. Karlawish: First, let’s get them diagnosed. First, we need to create a national network of centers for adult cognitive disorders where folks can go, get evaluated, and get an answer, which may be a diagnosis, may not be a diagnosis.

COVID has taught us that we can use telemedicine approaches for some of this, so we don’t have to have a center in every urban area, but maybe there are ways to interconnect them. We need centers that can get people a diagnosis.

Then we need to begin to deliver the standard of care. No one should be diagnosed with dementia caused by Alzheimer’s, Lewy body disease, whatever the disease may be, and not get education and training for how to identify the common problems, make a plan, and access the services and supports they need. We should do that.

Then back to your industry, we need to get your industry talking with my industry because you gals and guys are on the front line, oftentimes, of detecting things. How could we begin to learn from each other about what’s going on with a client so that, rather than just waiting for the disaster, some effort can be made to intervene and talk? That’s another area of progress.

More generally, technology holds a lot of possibilities for us to live better with this disease. One of the reasons why, in my family, I’m able to make sure things are OK with a family member is I have online view-only access to a variety of accounts. I can tell when there are problems going on or not. That’s because of technology.

So too with the car, monitoring the location of the car. There’s a host of ways that technology can allow us to maintain our independence in the community. These are all things we can do now. Everything I’ve described, we just have to muster the will to do it.

Patti: I have a dear friend who is at MIT. They have the MIT Age Lab, and I’m on the board there. It’s fascinating to me some of the things that MIT is coming up with to help people in these later stages of life, whether they have Alzheimer’s or dementia or not – carpeting that can sense when someone has fallen. I think the whole area is so interesting.

To your point, we may not get a “cure” in our lifetime, but we sure can band together and find a better way of approaching this awful disease.

Dr. Karlawish: Exactly.

Patti: It’s just got to be the American will, banding together and working together to figure out a solution and help to improve the lives of the patients and the families that are dealing with this.

Dr. Karlawish: A big, vast, national problem requires us to reach back to some of our core values. United we stand, divided we fall. I know that sounds rhetorically cute, but we’ve lived through a period of time in recent history, recent time – it’s not yet history because history has to be 30 years old to be history…

Patti: I didn’t know that. That’s interesting.

Dr. Karlawish: Technically, what makes something history, it happened 30 years ago or more. Whatever, that’s a convention in the field. We’ve lived through times where we seem to think that the way to advance is to divide. I think that this is the kind of disease where that’s not a useful approach. It requires leadership.

Patti: I agree with you. It’s fine to debate. Sometimes, having opposing opinions, together you come up with, ultimately, a better solution. As long as we are focused on the solution, working together to come up with ideas and alternatives, that’s the key.

Dr. Karlawish: For example, a couple more solutions here while we’re coming to the end here. We have to rethink the way we run residential long-term care. No one wants to “live in a nursing home,” but the fact of this disease is for many patients, there does come a point where home no longer works, the space that they called home for a variety of reasons.

I think it’s just simply folly to think that all long-term care should be and can only be delivered in the home. Certainly, it should be and should be available. We also need to recognize there’s a role for people to move to a residence, a place that they can now call home that’s different than the home they were in.

The problem is it’s a stereotype is the nursing home. Yeah, many of them are awful, but they’re not awful by the nature of being residential long-term care. They’re awful because we’ve never invested in the resources needed, and the regulations needed, and the ownership structures needed to create long-term care facilities that actually deliver long-term care services and supports.

Again, that’s another thing that can be solved right now. We just have to muster the will to do it. Many of the owners of nursing homes own them because they’re great investments of property. They don’t really care what the hell goes on inside of it.

Can you imagine if hospitals were run that way? I own this hospital because it’s a great real estate investment. I’m trying to do everything I can to cut costs to continue to profit from that. That’s the reality with nursing homes in America today. That’s bizarre.

Patti: It’s really interesting. Wouldn’t it be interesting if we approached this the same way we approach, as you say, hospitals or even schools? There are some pretty nice schools out there. Kids are learning.

It’s a really interesting alternative approach. There was a part in your book where you discussed the concept of home. You said that home is where the heart is. I loved that comment. I loved that quote because it is so true. People with Alzheimer’s and dementia, they don’t really know where home is.

Dr. Karlawish: They can begin to lose that. That’s right.

Patti: I will end with the one story that you told about Justice Sandra Day O’Connor. In fact, you can tell it if you’d like.

Dr. Karlawish: Justice Sandra Day O’Connor’s husband had Alzheimer’s disease. He had dementia caused by Alzheimer’s disease. The justice herself now recently announced, about a year or two ago, that she herself has Alzheimer’s. She retired from the Supreme Court in order to care for her husband.

Patti: There you go.

Dr. Karlawish: Good example of the impact of Alzheimer’s on the American family and our productivity. A Supreme Court justice stepped down in order to care for her husband.

There came a time in the course of his disease, not uncommon, sadly where he reached a stage of disability where home was no longer working. The home they were in, he was too disabled. He required too much intensive supervision and care that it just wasn’t working anymore for Justice O’Connor and the family to do that at home.

They moved him to a new home, to what we would call a nursing home, a long-term care facility, an institutional setting. In that setting, he met another person, another patient, another resident. They developed a relationship. As that relationship developed, he became actually calmer and better accustomed to the environment.

Frankly, it was a private matter that became public because O’Connor is obviously a public figure. The family was willing to confirm that that indeed had happened and that they were letting it happen, that they were understanding that their father had found a relationship that was working for him in his new home that was going to let him live comfortably.

They did what I think is the right thing to do within the boundaries of coercion and other things. They let it happen as opposed to breaking them up and separating them and whatnot.

I tell that story not because I think it’s a happy story or a sad story, but it’s a story about life. Life is a mix of the happy and the sad. The sooner we see that that’s what this disease presents, I think the sooner we’re going to be able to live with it.

All disease is bad, by definition. If it wasn’t bad, it wouldn’t be a disease. This disease is uniquely bad. I think we have to be honest in the ways that we think we are best to live with it and not pretend that we can drug it away or ignore it or all the other approaches that are just not very productive approaches.

Patti: Jason Karlawish, I don’t know what to say. You have so exceeded my hopes and expectations for this podcast. I have learned so much today. I’m so grateful for your expertise and how you laid things out. I’ve learned so much. It gets my juices fired up to see what I can do personally to move these things forward. It’s just one person and then another person and yet another.

Dr. Karlawish: Thank you, Patti. It really means a lot to hear that from you.

Patti: Grateful to you. We’re both in Pennsylvania. I hope that we can keep in touch. I mean it when I tell you I’m happy to step in and help any way that I can.

Dr. Karlawish: Thank you very much. That means a lot to me. I really appreciate that. Greetings to all your listeners. If people want to learn more about the book and my writing and the other work I do, they can visit my website, which is jasonkarlawish.com.

Patti: I will tell you I’m holding up the book as we speak on this video. It is literally amazing, just chock full of information. It’s also inspiring because there are solutions. There’s no one better to lead that charge than Dr. Jason Karlawish.

Dr. Karlawish: Thank you.

Patti: Thank you so much for spending this time with me today and with all of our listeners. Thanks to you for tuning in. I hope this was helpful. If you have any questions, please go to our website at keyfinancialinc.com.

In the meantime, stay safe, stay healthy, and know there are people out there who are willing to help. Thanks so much for tuning in. Take care.

Ep79: Resources for Parents of a Special Needs Child

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked, but should be asked, question). In this episode, Patti addresses another important question asked by her clients. “I have a child/grandchild with special needs, what resources are out there that can assist me in providing and maintaining a good quality of life for him/her?” Patti identifies some great state and federal programs, as well as key estate planning opportunities that should be taken advantage of. She also offers other solutions to questions regarding adoptions of children with special needs.

Patti Brennan: Hi, everybody, I’m Patti Brennan. 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. As you probably know, at the end of every podcast, I encourage people, go to our website. 

If you have a question, just send it to us through the website, and we’ll address it in the “Ask Patti Brennan” series. We get a ton of questions. The ones that I’ve gotten recently, especially as it relates to child care, expecting a baby, adopting a baby, and in those circumstances where a family may have a child who is disabled, what do we do? 

We’re going to dress the ladder. If any of you who are listening or watching has a child, or a grandchild, or a family member who has special needs, listen in because there are some really interesting things that you can do to maintain the quality of their lives irrespective of what may have happened. 

Today, we’re going to address the financial issues with heart, with an understanding, that is the most difficult thing that a parent can go through. There are solutions. First and foremost, let’s talk about what they are. 

The federal government and state government do provide really great social nets for people who need assistance because of disabilities. There are Social Security Income referred to as SSI and then SSDI, Social Security Disability Income. Now, if your child’s under the age of 18, and based on your income and your resources, they may qualify for SSI. 

In addition, they could also qualify for SSDI, if they became disabled before the age of 22. If you are receiving Social Security benefits yourself, you can also get Social Security. That helps from a cash flow perspective. It’s really important. If you don’t know about it, you’re not going to claim it. If you’re worried about whether or not you’ll actually get it, don’t worry about it. Try. 

If you’re turned down, which frankly some people are initially don’t stop, get an attorney and contest it. It just sometimes is the way things are framed so that our government officials understand what the challenges are that you’re facing. SSI, SSDI. 

Now, again, based on whether or not you’re able to collect, there’s also Medicaid for medical insurance. Medicaid gets a bad rap, but I got to tell you that that’s a wonderful benefit. There’s a lot of great insurance that is provided through Medicaid. This is exactly what it’s there for. 

For those people who don’t have the income or are in a situation where they may never be able to work, Medicaid is there for those people. 

There’s also something called CHIP, depending on the state in which you reside. CHIP programs are also there for assistance. Interestingly enough, I’ve had clients and I’ve had people who literally have chosen their state of domicile where they actually live based on these benefits, because sometimes the benefits are better, for example, in Illinois, than they may be in another state. 

You may want to research that. If it just means going over the border and getting thousands and thousands of dollars of better benefits, by all means, check it out. There are people who specialize in all of this, and that’s what you want. 

You want the resources. You want the attorneys, the financial planners, the social workers, the professionals who work with families, with children, and frankly, adults who are disabled, who will never be able to provide for themselves. 

Moving forward, if it turns out that you may not be able to qualify for those government benefits or your child may not be able to – I hate to use the I word – I’m going to tell all of you, “Go out and buy a big, fat life insurance policy,” because as long as you’re alive, chances are you’re going to be there and you’re going to want to provide for that child.

But what happens if you’re no longer here and if the rules change, governments change, etc. There is nothing like life insurance to solve a problem when it manifests. The thing that caused the problem if someone passed away, here’s the money to solve it. 

Be very careful how it’s constructed. You want it own by a particular type of trust. Again, I’m going to say it 1000 times today, “Get a good attorney who specializes in working with families with someone who has special needs.”

In addition, there is something called an ABLE account. If the child suffered his or her disability before the age of 26, they will qualify for an ABLE account. Now, at first, I was really excited about these accounts, but they did get watered down. 

The most important thing that all of you need to know is they can’t let the balance go over $100,000. ABLE accounts are there. It’s another kind of pot of money that can be used for the child where it won’t disqualify that child for government benefits. 

Now, let’s talk about estate planning because this is an area that a lot of people have questions about. There are some controversies. Should we have a trust for that child? Could we actually disqualify that child from the wonderful government benefits? Again, be very, very careful.

There is something called a special needs trust. If it is designed properly and has the right language, you can set aside money for that child, and it would not disqualify them for any of the wonderful government benefits that we all contribute to. I mean, I’m going to say as a sidebar, we all pay taxes, right? 

This is probably one of those things. I really don’t mind paying taxes because this is what America is all about. We’re here as a community to help those people who may not have been quite as fortunate, who may have just been born with certain disabilities and unable to provide for themselves. 

I think that this is an important social program that is out there to help those families and those children who will be very much in need for the rest of their lives. 

Special needs trusts are there. Again, be very careful how they’re constructed. As you think about the trust, you got to get the right trustee. Who’s going to be that person who’s going to understand what the rules of the game are and be able to give that child support and understand how it’s going to work in the state in which they reside?

From a tax perspective, a little kind of a sidebar perk, if you will, if it could be called one if you adopted a child with a special need with a disability, there is a child tax credit of $14,400. That will offset a lot of the adoption costs and provide you, again, another benefit of adopting a child with a special need. 

Even if you’re not adopting, you will get the child tax credits that are available to all Americans. It’s $2,000 per child depending on your income. If your modified adjusted gross income as a couple or partners is below $150,000, then that tax credit goes up to $3,600 if the child’s under the age of six. Again, just be aware that these credits and tax benefits are available to you. 

I think as we go forward, medical expenses are based on your adjusted gross income. Let’s say that the child is or the adult is able to work, but they’re not probably able to earn enough income to take care of themselves for the rest of their lives. 

If there are expenses, medical expenses that they incur, that person will not be subject to the 7.5 percent limitation against AGI, so 100 percent of their medical expenses are going to be tax-deductible. That’s important that whoever’s doing their taxes understands that and gets the full benefit of that write-off. 

Going forward, as we think about these things – again, I’m going to go more on the side of the parent – I think if there’s any time for you to specify how that child responds to a different type of care, let’s assume we’ve got a child with autism or some other disability, you know that child better than anybody.

If something happened to you, it sure would be wonderful if you could write down in a letter of intent or a letter of instruction what tends to work when it comes to managing that child on a day-to-day basis, and frankly, what doesn’t work as well. 

Write those things down for those people who may be taking care of your child after you’re gone. You may want to appoint a guardian or conservator. Again, this is all part of your estate planning. I would say that probably the most important thing is to find an advocate. 

Get an advocate, whether it’d be a sibling, a friend, somebody who’s going to fight like the dickens for that child. You want a support system and pull everybody together to make sure that that person, that child, that adult is getting the care, and the love, and everything that they need for the rest of their lives. 

Thank you so much for tuning in today. I really appreciate your questions. Please feel free, go onto our website at keyfinancialinc.com. Let us know what you want to hear about. Some topics are tough. This was a tough one. It’s what we’re all about. We’re all in. We’re here to help any way we can, and we can. Thank you so much for tuning in today. I hope you have a great day. Take care.

Ep78: America’s Economic Imbalance and Rising Inflation

About This Episode

Patti meets with her Chief Planning Officer, Eric Fuhrman, to discuss concerns most Americans have right now regarding rising inflation. To understand the relationship between our economic imbalance and inflation, they first define the two concepts and then give a global historical perspective. Is history repeating itself in relation to the economic crisis we faced with inflation during the 1970s or is this transitory, short-term inflation? What do the pandemic and global economic shutdowns for 2020 have to do with the rise in inflation we are now seeing? Patti and Eric delve into what is happening and why. As consumers, Americans should be aware of how long the economic recovery might take and what goods and services are affected more than others. As investors, Patti offers some suggestions on what steps should be taken during this time.


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 Eric Fuhrman. He is known by many of you who have been subscribing to the show as the Professor. The Professor and I are going to unpack a topic that…geez, it just seems like everybody is talking about today. Right, Eric?

Eric Fuhrman: I would say so. The only suggestion we might have, we should play some kind of dramatic music when we make the introduction. The Professor, you need some kind of drama to really…

Patti: We probably should get your Alma Mater, your school song, playing in the background, something like that.

Eric: Yes. Maybe a clip from “Gladiator” or something like that.

Patti: Absolutely. I’ll believe with this…

Eric: Russell Crowe movie.

Patti: With this topic we need the Gladiator. Today, we’re going to be talking about inflation, an important topic for everybody who’s watching and listening to the show.

Eric, it’s funny, I have to share with you something that someone told me about the podcast. They said that when they listen to you and Brad, they always feel like they get the facts and nothing but the facts. It’s unbiased and very clear, and they always walk away feeling better. I just wanted to say that to you. I really appreciate the time and effort that you put into this podcast.

I also want to let everybody know that in preparation for these shows, we put together whitepapers. Up until today, we haven’t put them on the website. It occurred to me that, “Geez, we’re doing all of this work. We’ve got charts, and graphs, and a lot of really good content.” In addition to listening to podcasts, you can go to the website, and you’ll also see the whitepaper addressing the topic that we’ve discussed.

With that in mind, we’re going to talk about, geez, what is the big deal with inflation? Is it something that we all need to be worried about? By the way, what are we going to do about it?

Eric: I just want to follow up on that comment there. Appreciate that. I think that we owe it to our clients but also anybody who listens to the podcast to really come with hard-hitting facts, not just facts but things that are supported by evidence that can be demonstrated by observing the world and what we see and weaving together a compelling narrative.

Hopefully, that creates a podcast that’s going to cause somebody to take the scenic route to work so that they can get all the facts and figures and listen to it from start to finish. That’s what we want. It’s not just for you to tune in but to tune in to the very end.

Patti: Oh, absolutely, and I know I would do it, especially knowing what we’ve put together for today’s show. It’s really good stuff. Again, to your point, it’s just facts. We’re hearing the headlines, and we’re hearing what the Fed thinks and what other people think. Where is all this information coming from? How are they backing it up?

Eric: What’s neat about you and me is we’re both nerds because we’re talking about inflation here, but I think what’s important is that the enthusiasm comes through and is infectious and that hopefully benefits anybody listening to the podcast that they come away with an understanding of something that maybe is not the most exciting topic but certainly affects your pocketbook and your finances.

Patti: It also affects how you sleep at night because, geez, you look at the headlines right now, and people are reading 5.4 percent inflation. This is scary. Are we going back to the ’70s? Eric, this is probably dating myself. It’s well before your time, but I find there is a generational difference between people’s perceptions of inflation.

I grew up in the ’70s. Geez, we had to wait two and a half hours in gas lines just to fill up our tank. In fact, I will never forget this, Eric. I don’t remember. It might have been 1980. The EPA came out with the most fuel-efficient car in America. It happened to be the Volkswagen Rabbit diesel engine. My father, Gene Clark, the father of seven children went out…

Eric: God bless him.

Patti: God bless him. He’s right. He went out and bought a Volkswagen Rabbit that fits for people if you’re lucky, but you know what? Hey, it gets 50 miles per gallon. The only problem that he discovered was that the tank itself was only 10 gallons. We were still waiting in line as often as the rest of us.

That’s the way we grew up with inflation and the long gas lines, and it’s never going to end if the world was going to run out of oil. It is a fear that’s out there. We remember Germany in the black and white pictures of the bread lines and something that you brought up about China which we’ll get to later.

It’s a very real thing because of these rising prices. If the incomes are not rising along with it, how are people going to afford to live?

Eric: What I think is so interesting is that what you really highlight on here, which is important, because I was born in the ’70s, at the end of the ’70s, I didn’t live through it. Our experiences really shaped our expectations of how we view inflation.

For me, I didn’t have an income back then. I wasn’t buying things. My parents were, but I just remember them complaining a lot when gas was more than the dollar a gallon.

The baskets of goods that I purchase throughout my lifetime are more things like electronics and other things. The basket I purchased might be different than the basket of goods that somebody who’s older that purchase, so we see it through different lenses really shape our AR experience in the time period that we grew up.

Patti: Let’s unpack this a little bit. Let’s give everybody a primer on inflation. What exactly is it, Professor?

Eric: Inflation can arise for different reasons. Usually economy at any given time is able to produce a relatively fixed quantity of goods and services, but the prices to produce those goods and services can drive inflation higher if this idea of too many dollars chasing too few goods.

There’s more demand than there is supply. We believe there is right now that can drive prices higher. It’s a human phenomenon that has been around for centuries, so it’s nothing new.

Patti: If I hear you right, it’s caused by an imbalance of some sort. Too much money, too few supplies. It’s an imbalance, right?

Eric: Right.

Patti: Now, we’ve got that. Right now, we’re talking about this 5.4 percent inflation. That is significantly higher than the Fed target of two percent. Are we on the weight of runaway inflation? By the way, is all inflation created equal as everything going up?

Eric: That’s a great point that people need to understand, is they tend to focus on that headline number. That’s a dramatic increase. Again, the number is measuring June from this year to June of last year. We were in a much different place last year where prices were not rising because we were going through COVID.

Patti: Boy, that’s a good point. Guys, really lock and load that point. It’s year over year. Remember where we are. Just as Eric just said, in June of last year, we were in lockdown. People were not buying anything.

Eric: Also, here, for those that are watching online, we are putting up charts of these graphs, so you can see it, but figure one that we’re going to present that the human brain needs to fill a void.

When you look at this number, you see a chart where it’s just going straight up. The brain has to fill that in, and the brain is likely going to say, “Well, it’s just going to keep moving in the same direction. We’re just going to extrapolate the past into the present.”

The reality is, when you look over a much broader timeframe, inflation has a lot of oscillation. It moves up dramatically. It falls dramatically. We just want to take a step back and realize that, yes, it is a big number, but I think we just need a deeper understanding and recognition that trees don’t grow to the sky. It just doesn’t go on forever.

Patti: I love this part in your whitepaper that referred to certain self-correcting mechanisms because what happens is when there is a lack of supply, prices go up, and then capitalism is what capitalism is. Other entities say, “Wow, they’re really making a lot of money. This profit-driven society that we have,” and more people get into that particular areas, so the supply increases.

As the prices are also going up, and then consumers, people like you and I are saying, “I’m not paying that much money for that house,” which is something that we’re experiencing right now.

How many people have we receive calls from who were looking at buying a second home or maybe getting a larger home and they’re saying, “You know what, we’re waiting this one out. The prices have gotten ridiculous”? That becomes a self-correcting mechanism also.

Sooner or later, more supply people are not going to be buying and having this feverish, pitch of overbidding for these homes, that’s number one.

Number two, as the prices begin to level out and even go down as lumber has, builders are now saying, “OK, I was pausing on building that development. We weren’t going forward with it, but now I can do so, I can build a home, and have a profit.” It does begin to dissipate over time in normal times. Let’s just say that, right?

Eric: Yeah. You highlight. This is Economics 101. We all have to figure out how to allocate scarce resources. You and I, as consumers, freely engage in cooperative exchange if it’s to our benefit. It is the buyers and sellers that set the price.

Transactions are occurring, prices are rising, but people are still coming together and finding value in that transaction. That transaction is ultimately what creates output and economic prosperity, which defines our standard of living.

If prices get too far out of whack, just like you’re saying, we hear people that are now saying, “I’m going to delay or defer the purchase,” you and I can make a decision whether we exchange or whether we opt out and say, “I’m just going to wait.”

Just like you’re saying, as more people are exchanging, if prices are rising, that will bring sooner or later more supply to the market because that means profit margins are going up or people decide it’s too high, it’s not worth it, and they wait. Now, eventually, the price will slow down or…

Patti: As inventories rise, it all comes down to that.

Eric: Or at least, that’s how all those charts go that when you were an economics class, you had to fill out on your test.

Patti: It’s interesting because it’s getting back to that 5.4 percent. I was fascinated with figure number two here in terms of, “Gee, what really is inflating and what really isn’t inflating?” Take it away, Eric. I thought this was terrific.

Eric: I think the point here is that the headline number is an aggregate basket of thousands of different products and services that are being valued. Inflation is most certainly not evenly distributed, and it affects some people in some industries more than others.

When you look at headline number 5.4, more than a third of that increase is just related to rises in used car and truck prices. That’s one element

Patti: That blows me away, I’m sorry. That is amazing of all of the metrics and all of the things that were are being measured. It’s not even new cars. I could understand the new car prices increasing faster because manufacturers can’t get ahold of the chips, right?

Eric: Right.

Patti: But it’s the used cars, which I just think is fascinating. It’s a third of the increase, which is not everybody is buying a new, used car. I don’t think that’s a word yet.

Not everyone’s buying a new, used car every single year. Not everybody is going to be affected by that part of the CPI U.

Eric: What’s so interesting, you have three categories that increased 44 percent year over year – fuel oil, motor oil, used cars, and trucks – but other things too like transportation services, airlines. You’ve had double-digit increases and these areas, but we have to think and put that in context of what has basically transpired over the last 18 months.

Yes, the numbers are high relative to history, but we’re also talking about a historical event that has not occurred in the modern age with just-in-time supply chains where people don’t build massive inventories. They order things when they need them.

Something like this has never occurred or unfolded in this way. I don’t know that you can say this situation is just like the 1970s. This situation is unique, and we have to understand that.

Patti: It is so interesting because again on that chart, figure number two, the second and third categories are motor fuel and fuel oil, which by the way, just to bring you back a year ago, do you guys remember that oil prices went negative. Negative. Now, that’s never happened before. That’s your starting measurement, and then you’re comparing it today.

Again, when you hear these figures, understand what they’re measuring, year over year versus annual things of that nature, and make sure that you are…At least, I’m going to speak from our perspective. We’re always evaluating these things in their proper context.

Eric: Context is everything. Some people who have been locked down in their homes will be happy to hear that alcoholic beverages have only increased by 1.9 percent, so far less than the CPI. Clearly, some people are benefiting from the inflationary trend.

Patti: Which is interesting, because I think that comes down to…I mean, everybody was drinking a lot more. Hey, you know what? It was out there, so I might as well go for it.

Eric: Moving on. What you tapped into earlier was this generational difference in terms of expectations, but it is interesting. Surveys are done on inflationary expectations, and there is a pretty distinct difference based on when you were born.

Some people would say certain cohorts of the population have a sampling bias to how they view inflations. Most of our clients tend to be on the older end of the age spectrum. We hear a certain perspective, and that perspective is really formed by experiences over 30, 40, 50 years.

Patti: You bet. At the same point, our younger clients who don’t seem to be as concerned about it, also need a little bit more education, that never says never, right?

Eric: Yeah.

Patti: We do have some of the signs of inflation that it could get to be an issue that needs to be dealt with in a more forthright manner. Let’s talk about the drivers of it.

Let’s talk about the drivers of inflation and then maybe break it down, Eric so that the listeners can get a better understanding of why the Federal Reserve and Jerome Powell, in particular, seem to believe that this is all going to be temporary. This is transitory. How come?

Eric: Inflation is a general rise in the price level, but it can occur for different reasons. Economics has given us a way to delineate between two forces that might cause inflation. The 1970s style would be what’s called cost-push inflation where you have some kind of shock or something that happens.

Basically, the natural resources that make the products that we consume or the cost of labor, these things are rising and that’s increasing production costs, and supply ends up shrinking because of that. If you and I still want the same kind of stuff, but there’s not as much of it to go around, that’s called cost-push inflation.

We think and believe when we look at what’s going on in different indicators that this is actually the other form of inflation, which is called demand-pull. That’s more of a situation where demand is growing, and there’s just supply is not growing fast enough to meet everyone’s demand.

If you want to tease apart COVID and decisions that were made, I think we have a framework that supports the demand-pull inflation theory more than the 1970s style cost-push.

Patti: All of the things that were done in 2020, during COVID, whether it’d be fiscal or from the Federal Reserve, fiscal in terms of checks to every American, rich or unemployment benefits, the evictions.

The fact that people couldn’t be evicted from their homes and their apartments, and then the Federal Reserve stepping in, lowering interest rates, and doing the bond-buying programs to increase the supply of money in the economy, making it so that banks didn’t have to have the reserves that they did before that loosened up the lending requirements, and so the banks could lend more.

There’s a lot more money in the economy, just pure cold cash. On top of it, we were in lockdown, and we couldn’t spend it. Savings rates went up, and that was wonderful, but eventually, that will catch up with us.

Eric: It’s interesting. For us, we have our client base to take a sampling, but how many phone calls that we get our client said, “Well, we’re just not spending money. You don’t have to send us the same amount, or you can stop the distribution. We’re fine on cash”?

These are people that are not doing this discretionary spending, and cash is just piling up, is not being spent. As you pointed out, you have a government stimulus that is injecting money into the economy and directly into people’s pockets.

Patti: It’s really interesting. I just thought about this. Even the suspension of the requirement for people to take their required minimum distributions, most of our clients, they said, “Hey, I don’t need it. Don’t send us our required minimum distribution this year if we don’t have to take it. Just leave there.”

As a result, their taxes went way down. I just think the domino effect of all of the decisions, it’s fascinating. The unintended consequence could be some inflation.

Eric: When you put the pieces together into this mosaic of this demand-pull theory, what you come away with is what you’re describing, is that there’s pent-up demand. There are people that have cash. There’s stimulus, but guess what? They can’t spend it because of lockdowns and social distancing.

Those things are now melting away or have been removed over the last couple of months, so you’ve got all this money and all these people that are itching to get out and spend. You’ve got a huge burst of demand.

Think about producers. Think about businesses. If you’re a business and you go through something like COVID, what do you need to survive? You need cash. You need lines of credit. If you have inventory, inventory is cash tied up in the balance sheet, so what do you do? You liquidate.

As we’re piecing together this theory, you have a lot of cash, a lot of pent up demand that is basically being released all at once, not over time, at the same time that you have suppliers that are dealing with record-low inventories and cannot rebuild them because they needed cash to survive. Inventory’s been liquidated. You’ve got these two really incredible forces coming together at the same time.

Patti: Eric, it’s so interesting because as we were preparing this podcast, you told me about the story of taking your family out to a restaurant this weekend. I will have you tell that story, but I think that along with inventory…

Remember, we are a nation, an economy, of goods and services. Geez, as part of this whole issue, many people let their employees go or put them on furlough, never to see them again. Why don’t you tell our listeners what happened this weekend?

Eric: My mind was in tune with this because this is something that’s been in the works for a while. I took my family out to a restaurant that was on the water, a beautiful place. It was so interesting. We went to check-in, two and a half hour wait, people, sitting everywhere. In my mind, I’m thinking, “Wow, a lot of demand. People want to get out.”

As we wandered around while we were waiting, trying to pass the time, the interesting thing that I noticed is there’s a two and a half hour wait, there are people everywhere, but there are empty tables all over the place. Why are there empty tables?

Patti: There were no servers.

Eric: Right.

Patti: Right, they…

Eric: Not enough people to wait on it, so there is a true economic cross. That kind of thing can play out in terms of rising prices, but there is also an opportunity cost because those are sales that those businesses are not able to realize because they can’t service the customer.

Patti: Exactly, and they don’t have the people putting in the orders, therefore, they’re not having that sale. In this example, it might be a meal, but sales occur at all levels of the economy. Therefore, they don’t have the profits. That goes on too long. Guess what? They’re out of business.

Eric: That’s an example of the service business, but we can look at evidence of inventory ratios, and this is common sense. You can observe this with your own eyes when you go around – inventory of housing, inventory of autos, inventory at retail stores.

There is a metric called the inventory to sales ratio that you can look at. Normally, what you want to see is a low inventory number, right? You don’t want too much cash tied up in inventory because that’s money that’s inefficient.

You want to try to keep balance, but what we see now is you have inventory to sales ratios that are rock bottom. They’ve never been so low. That’s not a sign that businesses suddenly became magically efficient in the last 12 months. It’s a sign that they don’t have a product.

If you don’t have a product or there’s very little of it, what happens? The price goes up, or you can’t record sales because you don’t have the stuff to sell. To me, that’s an interesting way to see another thing that feeds into that demand-pull inflation story that there’s not enough supply to satiate demand.

Patti: That’s a metric that the Federal Reserve looks at. That’s an important thing for everybody listening and watching today. They’re not making this stuff up. That’s a ratio easily obtained when you go on the Federal Reserve’s website. Another important statistic that delves even…

Eric: If you’re like us, it’s easy because we’re on there all the time. We know what to look for.

Patti: That’s true. We’re nerding out again. Sorry about that. Good point.

Eric: It’s not as easy you think.

Patti: OK, guys. Do you think that one was bad? Wait till you hear this next one.

It’s called the Baltic Dry Index. Don’t I know you want to turn off your phone and run to your computer to look this up because it’s so fascinating. However, it does give us a very good idea of what might come in the future. Eric, why don’t you explain to everybody what it’s really measuring?

Eric: Gosh, it’s a term that I don’t know ever gets worked into very many meetings, but it seems relevant today.

Patti: Fire away.

Eric: I tried this one on my family. “Baltic Dry Index, what are you talking about, Dad?” Basically, what the Baltic Dry Index is, when you think about this supply and demand story, if retailers don’t have inventories, keep working your way back to the origin of the supply chain.

Where is the genesis of the supply chain? It starts with raw materials like copper, iron ore, grains, whatever it is, that’s the beginning. All those goods, those raw materials that eventually are turned into intermediate to finished goods that we end up buying, have to be sourced and shipped from all different parts of the globe.

The Baltic Dry Index looks at 20 different major global shipping routes and four different classes of shipping containers from ones that can go through the Panama Canal to ones that can’t. It is a very clear leading indicator of the global demand picture, which will eventually unfold because if there’s a great demand for shipping containers, the price of those containers will go up.

What you’ve seen is an almost eightfold increase in the cost of shipping containers since probably May of last year. The price of the ship things has skyrocketed. That is a sign of this unfolding conspicuous demand story that people don’t order raw materials unless they have orders to fill.

Again, retracing the supply chain back to the original point of origin continues to paint that interesting picture that, again, supports this notion of more of a demand type inflation than a cost type inflation.

Patti: Let me play devil’s advocate here because what I’m hearing from you is this is probably not going to be another 1970s. I’m going to reveal my generational difference here, but wait a minute, Eric.

The ’70s rampant inflation was really fueled by – no pun intended – the oil crisis and the rising prices of oil. Why is this different? Isn’t it true that it’s the same thing all over again, we can’t get a hold of the raw materials quickly enough, and so, therefore, prices are going up?

Eric: Nothing is ever clear cut in the world. There is no you can point to this and say, “It is exactly this and this is the cause.” We’re talking about decisions that are made by billions of people and businesses all across the world.

We’re just trying to think of a framework to understand it. There’s no doubt that resource prices are rising, oil’s going up. Months ago, lumber was skyrocketing and hitting all-time highs.

There is some of that there that supports this other notion, but what we’re trying to define and boil it down into its most basic components, what are the real primary drivers? Are those costs of raw materials, copper, and things like that going up?

Yes. You can look at a chart, and you can clearly see that those things are going up. What are the reasons? What are the main drivers?

Patti: How permanent is that going to be?

Eric: Exactly. It’s more of a situation where the entire globe shut down in unison and it is opening up in unison.

A lot of people have money to spend. They want to spend it. Supply is nowhere to be found because people weren’t producing for so long.

Patti: It’s a perfect storm.

Eric: It’s just going to take time to catch up.

Patti: I got it. What I think is interesting is, look at what’s happened to lumber. It skyrocketed, and now it’s come back down again. It does support that theory, certainly in that example.

Let’s go forward. Let’s focus now on what’s going to solve this problem? We talk about the government and the Federal Reserve and their role as we’ve spoken in prior podcasts, is really to issue policies that are countercyclical.

When things are really bad, they both step in to save the day, if you will. We’ve seen that in terms of the money supply, and lowering interest rates, and issuing checks, and it really did work.

Let’s go back a little bit in history, OK? That’s fine and dandy now, but we still have inflation. We’re still worried about this. Why don’t we just slay this dragon once and for all? For example, can we go back to the gold standard? Won’t that solve it? Because there’s only so much gold in the world.

Eric: I think its interesting people would say, “We’ve got to go back to sound money, hard money, and that will solve the problem.” If you look at history, all types of things have served as a store of value.

Gold just happens to be the one that human beings, for one reason or another, just – I’m trying to think of the right word here – fascinated by its golden luster. It’s got visual appeal and so forth.

Patti: That, too, is also cultural because as you brought up last night, China, their gold standard was actually not gold. It was the rice standard because that’s what was so important to the people of China.

Eric: I think at some point it was back in the 16th century or something like that, but yeah.

Patti: I’m dating myself again, guys, OK?

Eric: Oh my goodness, yeah.

I think there’s a notion that you could return to that, but the history there, the United States had a binding metallic standard of gold and silver. Then about 1871, gold basically supplanted silver. We were on a hard gold standard from 1871 to 1914, somewhere around when World War I broke out.

I think the founding of our country and most democratic governments, people have this natural distrust of government-controlled money.

When you think about the history of monarchs and so forth, how did monarchs attain wealth? It was by ex appropriation and transfers, devaluation when they spent too much money. Just the monetary affairs were usually completely mismanaged at the expense of the population.

I think the gold standard is really a way where the government cannot intervene and engage in some of these things that essentially rob the population of wealth.

The issue that you have with the gold standard is that – we use this example of Rip van Winkle – if you fell asleep in 1871 when we adopted the gold standard and woke up in 1914, the price level was virtually unchanged. The gold standard was successful in keeping inflation contained, but that doesn’t mean there wasn’t inflation or deflation during that period.

What you have is if you’re trying to maintain the value of the currency, the price level now swings fairly wildly up and down because it’s reacting because there’s a difference between how much money there is and how much we’re producing at any given time, and that causes a change in price.

That oscillation creates dramatic swings in the business cycle. When you look back historically on a gold standard, you had some very deep but very, very frequent recessions. There was basically an even distribution of recession and expansion, recession and expansion all over again.

That’s part of the problem of the gold standard is it makes the business cycle unpredictable and unstable. Again, if you look at it during that period of time, it was a period of a lot of oscillations in the underlying economy.

Another problem with the gold standard is there’s not enough of it in the world to basically support today’s level of transaction. A lot of the reserves are lying in the ground of people that we would consider our enemies, places like Russia and China, for example. In effect, we’d be conceding control of the money supply to them if you went to a hard gold standard, so probably not ideal.

Patti: With this fiat system, which is basically a paper-based monetary system, it allows the government to do many of the things they did last year, to act and issue policies that will serve as a shock absorber, right?

It’s not going to slay the dragon of the business cycle. We’re still going to have ups and downs. We’re still going to have recessions.

The goal here – and what I think has occurred over time through experience and learning what works, what doesn’t work – is that it actually seems to be they’re issuing policies that are making these recessions less frequent, not as deep, and helping us to recover quicker.

In fact, just this morning, there was a report that basically said this has been the fastest recovery in the history of our country. The fastest.

Eric: That observation is spot on. This notion of government activism and counter-cyclical economic policies really came as a result of the Great Depression where basically policymakers acknowledged that the market is not always self-correcting.

Sometimes, you need policies to help arrest the deflation and help the economy recover faster. This is really based on the teachings of John Maynard Keynes. If you want to know more about that, you can go back to our podcast on the output gap from back in April, right?

Patti: There you go.

Eric: If you want a more expansive discussion, refer to that one. This idea is that you engage in countercyclical policies. Just like you said, the government can increase the money supply not to create inflation but to act as a shock absorber.

If you say, “Well, what is the record of that compared to the gold standard?” what you’ve seen is that the duration of the recessions has been cut in half, expansions have increased substantially from what they used to be. You’ve got shorter recessions, longer expansions, and far fewer recessions compared to what you had historically.

Patti: Eric, I’m just going to layout these statistics in figure nine, because it is really dramatic. Under the gold standard, the average length of contractions was 22 months. Since that time, it’s now 10 months.

To your point, we’ve cut the length of these contractions or these recessions in half. What I think is actually even more inspiring is that the length of the expansions has increased from 25 months to 64 months. That’s dramatic.

They are shorter in duration in terms of the contractions, and the expansions are far longer. Combined, that delta is really creating a powerful and has created a really powerful economy, a prosperous economy. I think that’s the whole point of all this.

Again, what’s the side effect? This is like medicine. There are side effects. A potential side effect could be inflation, and that’s something that the Federal Reserve and everybody are very, very conscious of.

Eric: I think what’s important maybe for the listeners to understand are, what are the trade-offs? There are trade-offs to both systems. Something like a gold standard, yes, it is very effective at maintaining the price level and arresting inflation. The trade-off is more volatility in the economic cycle.

What policymakers have figured out, and part of this is an experiment they continue to learn. If you have a gradual but predictable increase in inflation, what that creates is an environment where people are more likely to maximize consumption because it’s predictable, and they’re likely to consume more.

Think of it this way. Consumption is current prosperity. Future prosperity is dictated by investment. When you have predictable but low levels of inflation, that encourages more investments. What you’re really trying to maximize are those two things that drive current and long-term prosperity, consumption and investment.

Yes, the price level does rise, but as long as it is controlled in a gradual fashion, you get those. That ultimately, I think, is what has driven the shorter recessions and also the longer, more prosperous expansions.

Patti: The data proves it. Looking back as you did over 200 years, making the comparison to what it was versus what it is, I think it’s fascinating to go back to the 1700s, the 1800s. Granted, there wasn’t any inflation, but the abject poverty throughout the world was incredible. I mean, the quality of life, standards of living never got better.

Fast forward to the 20th century, and to see the difference on a chart, it’s remarkable the increase in prosperity throughout the world. Yes, inflation has definitely been significantly higher, but the level of prosperity and the reduction in worldwide poverty, it’s just immeasurable in terms of being able to articulate the benefit of some of this learning.

We keep on focusing on learning because it is a great human experiment. That’s what economics is. Many universities have taken the study of economics out of the business school, and they’ve put it in the Schools of Arts and Sciences because it is an art. It’s something that over time we learn and get better at.

Again, we understand the side effects of some of the policies, inflation being one of them. We understand that a third of it is the increase in used cars. That’s significant. How much are we going to thwart this thing called inflation through government policies if it is really temporary? Let’s talk about what happens if things get out of control? What does the government do to control inflation?

Eric: Inflation, if it’s modest, is a good thing. But it can certainly get out of control, and a lot of that has to do with the credibility of governments and institutions to make the tough choices to rebalance the economy when these things are getting out of line.

Back to the historical record, yes, we’ve had inflation. Compared to the hundreds of years prior to, say, the 20th century, we’ve had massive inflation from 1900 to 2000. The price level is increased 23 fold.

By the same token, we’ve also enjoyed unbelievable economic prosperity during that time. An interesting way is to say, “Well, how does our government manage inflation relative to other global partners?”

Patti: That’s a really good question.

Eric: Have they done a good job, or haven’t they? There’s no doubting there’s inflation, but how do we measure if they did a good job or not?

Patti: Different nations experience more or less inflation and how did they deal with it compared to the way that we’re dealing with it because the policies have been different.

Eric: Exactly. There was an interesting study that we came across for this podcast as a really unique way of looking at things that I never considered, but one way to measure inflation is to look at exchange rates. What is the exchange rate between, say, the dollar and the British pound, or the Japanese yen, or the Swiss franc?

Patti: There you go.

Eric: But looking at them over time, because ultimately, there’s a theory. Again, this is all about economics today. Sorry, folks, if you didn’t know that getting into this one.

There’s a concept known as purchasing power parity, and the idea is that the United States and let’s say Switzerland, they enact policies, economic and monetary, to support and maximize the benefit of the citizens in their country. Those inflation levels may be different. Eventually, those differences will show up in the exchange rate between the two countries.

If a country has a higher level of inflation, over time, you would expect their currency to depreciate relative to the other country.

When you think about, how is our government managed, how do we give them a grade for managing inflation, what you would have to look over, say, the last 50 or 100 years and say, “What country’s currency appreciated against the US dollar?” because that would say that their inflation has been lower on a relative basis, assuming the theory is correct.

The reality is you only find four global trading partners that actually experienced an appreciation, and really only two of them that had a significant appreciation in their currency relative to the United States.

That would be another way to say, “Well, what’s our grade, relative to other people?” We’ve done pretty darn good considering that these countries that have actually seen a better outcome are a fraction of the size of the United States.

Patti: I think it’s also interesting to take a look at the countries that experienced that hyper, hyperinflation, like Germany and some of the other countries. I found it fascinating to learn that the ones that had the real issues, the primary catalyst was that they lost a war.

As a result of losing the war, their governments chose to print a lot of money – for lack of a better word – increase the money supply, and as a result, rampant inflation occurred.

Eric: Yeah. You just have to think about the realities there. If you’ve lost a war, your infrastructure and productive capacity have been destroyed, so how do you provide? You can’t tax people, because they…

Patti: They don’t have any money, yeah.

Eric: …on incomes, so what do you do? You print money like crazy. Yes, there are very few instances of hyperinflation, but the catalyst or the common denominator is usually being on the losing side of a major conflict more often than not. Interesting through-line between those things.

In any event, I think maybe to wrap this up is, what are the policy tools available? Again, governments have to be credible that they will make the hard choices necessary because inflation is about expectations.

Patti: Before we go there, I would imagine that everybody listening, they want to know what those four countries are, so…

Eric: Oh yeah, no problem. Go ahead.

Patti: …let’s tell them. The Netherlands, Netherlands Antilles, Singapore, and Switzerland. Those are the four countries where the value of their currency actually appreciated against the dollar.

Now let’s get to the bottom line. Inflation goes from 5.4 percent to 7 percent to 10 percent. What is the government going to do? What can they do?

Eric: There’s fiscal policy and monetary policy. Monetary policy, thank goodness, is independent of political influence, so they can act quickly.

Fiscal policy, not so much unless they’re faced with a crisis like COVID or something like that. Fiscal policy is through taxation, and government spending will affect inflation. If there’s too much money floating around, the government can raise taxes to drain the system of that excess money.

They can stop spending when the government runs a deficit. They’re spending in addition to the private sector, so that’s more money chasing after fewer goods if they can manage deficits.

The problem is we’re coming out of an economic crisis. The government is still in countercyclical policy mode. This would be the antithesis of what you would normally do in a situation like this where we’re just trying to get back online again. I don’t see that as being viable, at least in the near future, but the monetary policy would be. Those are the traditional toolbox.

Patti: Increasing interest rates, increasing the requirement for banks in terms of how much they keep in reserves, paying interest on bank reserves instead of…

If I were the president of a bank, and if the Federal Reserve was going to pay me three percent on my reserves – when right now they don’t get anything – gee, why would I lend it out to somebody and take the risk that I may not get that money back? This is a no-brainer. I’ll just get the interest from the Federal Reserve.

Eric: I think that’s a critical distinction for our listeners is that when people see the Fed’s balance sheet as seven trillion or whatever it is, people automatically make this assumption that the money supply has drastically increased, and now you’re going to have all this inflation.

The Fed is conducting these policies in the interbank market, so they are taking bonds off the balance sheet of banks and replacing them with cash. That’s not money that is now in the economy to spend. What creates inflation is that now the banks have cash, there’s the incentive to then lend it out to create loans. It is the loan origination process that injects more money into the system.

The Fed’s policy is meant to provide liquidity and incentivize banks to lend, but it can go both ways. They can pull the cash out and swap it with bonds if they want to go in the reverse.

Money can be, in effect, created or destroyed in the same manner very quickly by the Federal Reserve, but it’s not necessarily inflationary, and so banks start lending. That’s really looking at debt growth and loan origination.

Patti: If anybody listening has applied for a mortgage lately, you will also understand and you already know that it’s not an easy process. The lending standards may have relaxed a little bit but not that much. In fact, they got really bad last year during COVID. In fact, many of the major lenders were not even offering jumbo loans. They were out of that business.

Eric: I was going to say, I don’t know if that’s a subtle suggestion of a preview into the next podcast. I don’t know, maybe.

Patti: That could be a really good one. Eric, as you were talking about the banking sector, and the lending standards, and things of that nature, I was reminded immediately of today’s “Philadelphia Inquirer” article that directly talks about this point.

The headline reads, “More mortgages mean more debt. Talk about clickbait.” I was like, “Oh, no, are we getting into another financial crisis?” Yet, when you dig…

Eric: The original conclusion.

Patti: Exactly. Guys, here we go again with the headlines. Just got to read the article and get the facts. “With increased home sales, originations rose.” That’s not surprising, but loan levels are far behind those before the 2008 crisis. In the last 12 months, 44 percent of the country’s entire $10.4 trillion worth of mortgages that were approved were approved in the last 12 months.

These were refinanced so that the debt service levels, which you and I both know because we see the data, is actually significantly lower. The monthly payments have decreased. What I also think is fascinating and really go to this point of, “We’re probably not headed for another financial crisis,” 71 percent of mortgage originations were with people who had a credit score of 760 or above.

Wow, that is a huge FICO score. These are not people who are going to be in a position where they can’t make their monthly payments. That is a very, very high standard for a loan.

I think that that, yes, there are more people that are refinancing. They may be buying homes, but the people who are doing it can afford to do so, and/or they’re making sound financial decisions by refinancing existing mortgages and lowering their monthly debt service.

Eric: Which in an interesting way, inflation above the cost of your mortgage would actually make it easier to repay over time.

Patti: There you go.

Eric: It all depends on whether you’re a lender or creditor. Inflation can be a good thing, or…

Patti: Absolutely. The other thing is that the mortgages that were approved – I think it was 30 percent or more of the mortgages were adjustable-rate mortgages before the financial crisis – it’s two percent. People are getting fixed mortgages.

Again, to that point, as long as we understand what the rules of the game are, that inflation is going to remain relatively level and that the cost of doing business or providing for our families, yes, it might increase, but it’s not going to increase out of sight that we can manage that.

Then on top of that, you have a family that refinances their mortgage, and now there is no increase. I will tell you that Economics 101, 10 years from now, that family is going to be in a much better place.

Eric: Amen. I took your advice from one of the podcasts I refinance.

Patti: Attaboy, so glad to hear that.

Eric: You’re right. We’re practicing what we preach.

Patti: By the way, guys, if you haven’t refinanced, it is not too late. Do you know that this morning, the 10 year Treasury was 1.16? It peaked this year at 1.7, so interest rates upon…The 10-year Treasury is what people look at when we’re talking about mortgages.

You just have to look at the 10 year Treasury to get a feel for what mortgage rates are doing. They’ve actually come down again. For those of you who are listening, it’s not too late to refinance by all means. If you plan on being in your home for – pick a number – four years, five years or longer, it’s probably a very good idea to do so.

Speaking of which, let’s close this with some ideas. The podcast today is about inflation. What, if anything, should we be doing for our clients, with our clients to really hedge against this thing called inflation?

Eric: I would say the first thing coming out of the pandemic is that cash is no good.

Patti: That’s right.

Eric: Inflation is probably the worst thing you can have, so cash isn’t going to go down, but its real value after inflation is going to be significantly diminished. Cash is probably among the worst things you can do unless outside of just needing money for short-term liquidity.

I think it also depends on your thesis, is inflation transitory. Is this part of a longer-term thing? Ultimately, no one knows the future, but we have to make educated guesses. If it is transitory, usually, short-term inflation is not good for really any kind of asset, maybe Treasury inflation-protected bonds, but generally, stocks and bonds don’t perform well with inflation.

But long term, if this is a long term problem, stocks are…If you believe Jeremy Siegel, he read stocks for the long run. Stocks are claims on real assets, which have the ability to adjust as the price level rises.

It might not happen in the short run but over long periods of time because stocks are claims on future production. They’re really the best mechanism to have an inflation hedge when we’re thinking in periods of 10 years or longer.

Patti: I liked the way that you framed that in terms of it depends on your perspective, in terms of is this transitory or longer-term, because if it’s transitory, not a lot should be done. Let’s just put it out there. Don’t make major changes in your portfolio just because some headline says, “More mortgages mean more debt,” and scaring us into doing things that are probably not in your best interest.

Eric: The potential tax consequences would probably be more expensive than the actual inflation itself if it’s, say…

Patti: Absolutely. Over time, markets will take into consideration that everything is inflating and the market tends to follow. Folks, that does it for today. I so appreciate you, Eric. Thank you so much for all the research, the data, your perspective, your young thing, who’s never experienced inflation.

Thanks to all of you. We really, really appreciate you being here with us today. We value your time. That’s why we put as much work into these podcasts as we do. Go to our website, the whitepaper will be there. It probably won’t be as funny as Eric was today, but it certainly will be an education.

If you have any questions, please go to our website at keyfinancialinc.com. Let us know what you think. More importantly or equally as important, let us know if there’s something that you’d like us to talk about. We can do basically an “Ask Patti Brennan” type of series which is 10, 15 minutes on a particular question, or we can do another deep dive on a topic like the one we’ve talked about today.

Thank you so much for joining us. I hope you have a terrific day. I’m Patti Brennan, and we will see you again very soon take care.

Eric: They can get out of their car now and go into work.

Ep77: America’s Small Businesses – Can They Survive?

About This Episode

In America today, there are 31 million small businesses. These small businesses represent over 99% of all companies nationwide! Many of them fight month to month to remain profitable without the threat of a global pandemic. What was the difference between the companies that made it through 2020 and those that did not? In this episode, Patti interviews four different consumers in different demographics to discover their favorite small businesses they chose to support and she learns a few “secrets” as to how these businesses were able to survive – and thrive – through the pandemic. The key to small business success may be the same key to success for major corporations as well!


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, we’re going to be talking about small businesses and the impact that COVID had on small businesses. The statistics are quite alarming. In America, today, there are 31 million small businesses.

By the way, what qualifies as a small business? Basically, the definition is a company that has 500 or fewer employees. To be perfectly honest with you, most companies, most small businesses have much fewer employees, the average being about 10.

What was the difference between the companies that made it through and the ones that didn’t?
Unfortunately, in spite of the government stimulus, PPP programs, incentives, many, many businesses failed.

Unfortunately, while the estimates were that 400,000 additional businesses would fail as a result of the lockdown, the good news is the data is suggesting it was about half of that. That’s 200,000 small businesses that were closed.

We have to keep in mind, America was built on small business. What do we mean by that? Well, guys, I got some information for you. In America, today, small businesses represent over 99 percent of all companies nationwide, 99 percent.

While they may be small, they are huge when it comes to our economy. This is important, because what we’re learning is that what COVID has done, especially, if I may say, with larger companies, employees are getting tired of that corporate world.

They’re being forced to go back and do the 45 or hour long commutes. They’re beginning to think, “Gee, do I really have to do this grind for the rest of my working life? Maybe I should start a small business.”
We’re going to talk about what was it about the businesses here locally that made four very diverse consumers not only continue to use them but are now using them even more as a result of their response during a difficult period of time. Let me do some introductions.

First and foremost, Matthew. Matthew is our newest employee. Welcome.

Matthew Mainwaring: Thank you. Good to be here.

Patti: Kristopher is our Army Ranger, father of a newborn. Jessica, mother of three –three young boys, sort of middle boys – and Bernadette Hunter, the ultimate consumer, mother of four. Thank you all for joining me.

Here’s the question for all of you. We’ve been through a difficult time in our country. We’ve all gone to restaurants, and stores, and things of that nature before COVID happened. Then, we had the lockdown. Now, we’re out again.

I would be very curious to hear from each one of you, because you each have different perspectives, has anything changed before versus after? Are you finding yourself going to places more often, or not at all anymore, based on what happened during the lockdown?

Keeping in mind that the people who are listening to this program today may be interested in starting a business. You’re going to be giving them some hints and ideas, in terms of things that work for you as the consumer and why you continue to do business with these companies.

In other words, we want to make sure that anybody starting a business today does not become one of the 200,000 failures that occurred in the last year. Let me start with you, Kristopher. Let’s talk about restaurants.

During the lockdown, it’s not like we were able to go to restaurants, sit down with our families, etc. Tell me the before, during, and after for your family.

Kristopher Thompson: Before COVID struck, and the shutdowns, and everything, we were free-for-all-ing it. We would go out a lot. We found out we were pregnant and COVID hit very shortly after that. Our lifestyle had immediately stopped, in terms of going out and all that stuff.

Patti: For two reasons, right?

Kristopher: Yeah.

Patti: You’ve got COVID, and then you’ve got your beautiful son.

Kristopher: Then, the additional concern of pregnancy, and a baby, and things like that. From going out anywhere anytime to being more concerned about not being enclosed with a lot of people when the height of COVID was a concern, we started going and walking around West Chester and going to Jaco Taco.

Patti: I was going to say give me names. I want to know names, guys. Where did you go, and why?

Kristopher: We went to Jaco Taco. They had a little sit down area before. We would sparsely go in there for a smoothie or whatever. After COVID struck, they opened up a little window where you could walk up, do a contactless order and all that.

A good reason to get out in the open air, walk around, get a quick smoothie, or a Taco, or whatever. We started frequently going to Jaco Taco on and off.

Patti: How about now?

Kristopher: We’ve kept up with that pattern. We go on a morning walk every day. For budgeting purposes, we try to not go out to eat every day. We definitely go at least once a week, like a Friday morning routine is we’re going to Jaco Taco every day.

Patti: They adapted to the new reality, made it easy to do business with them in spite of it, and as a result, you’re going there now more than ever.

Kristopher: Yeah, definitely more than before COVID for sure.

Patti: College graduate, brand new job, what about you? Tell me what restaurants did you like to go to, and have things changed? By the way, I totally get the fact that you’re not in a dorm anymore, so we’ll keep that in mind.

Matthew: Not in a dorm anymore, but I’ve started go to, during the pandemic, the Split Rail Tavern in West Chester. I’d gone a little bit before, but I wasn’t 21 yet, so there’s a bit of a limit selection there.

Ever since the pandemic, they were doing a lot of takeout, so we were doing takeout there. One of my favorite dishes is their mac and cheese, has Cheez Its sprinkled on top of it. They just started back up with their live music, too, so we’ve started to go on Saturday nights to listen to live music there, which has been great so far.

Patti: You get the food, the entertainment, and you feel like OK, life is coming back to normal.

Matthew: Definitely.

Patti: Fantastic. Excellent. Jessica, mother of three boys. You feel like you’re always feeding them, right?

Jessica Stunda: All the time.

Patti: Where are you going?

Jessica: Before the pandemic, I have to be honest, Wawa was one of our favorites…

Patti: You and me both.

Jessica: …because you could pick up a quick meal, and then get gas for wherever you needed to go after that. During the pandemic, I had a friend from grade school who was a chef on one of the chef competitions.

He saw an opportunity and started his own business called Philly Hots. What he’ll do is he’ll make a gourmet meal that all you have to do is throw in the oven or the microwave for a few minutes and voila, you have dinner for your family.

Patti: Pandemic or not, I am calling Philly Hots.

That sounds like a dream come true.

Jessica: It started out with just posting it on Facebook to a few friends, and now, he has a weekly rotation of different meals. They’re delivered usually by his wife and his daughter, which is great, so it’s a family thing. He has a little kitchen in a little church, I believe, in West Chester.

Patti: That’s fantastic. Thank you. How about you, Bernadette, where did you go before, and where are you going these days?

Bernadette Hunter: Being recent empty nesters, my husband and I had this idea that we could go anywhere, we could do anything. A week before the PA shutdown happened, my oldest daughter, her six week old, her husband, and her yellow lab moved into our house.

We weren’t empty nesters anymore, and there was a little bit of stress involved with that, a pandemic and a newborn. We were trying to keep things as normal as possible.

One of our favorite restaurants in town is Limoncello. On the weekends, and it turned out after our first experience with them, we went every weekend, we got Limoncello. I’ll tell you why, because nobody else brought this up. A very serious turn in the pandemic was no alcohol.

Bernadette: It was very hard to get wine or anything you wanted. Limoncello, not only did they give you double portions of everything, because they were so grateful you were coming, they also created drinks in containers that you could get.

They gave you so much extra that the four of us had food for two nights and we would just order a couple of entrees. They devised the system – only my husband and my son-in-law were leaving the house at that point because we had a newborn in the house – that you could just pull up. It was like a delivery line and they would bring it out to you.

These servers were so grateful, A, to have a job, and then if you tipped them, it was sad. They were so grateful for everything that you tipped them. We kept coming back. The food is excellent, and we go back there all the time now.

Patti: That is interesting to me. I should know this, but are they continuing that process where you can order and drive up and leave? Is that a permanent change?

Bernadette: Yes. Now, they have two open spots in front of their restaurant for curbside pickup. They created what’s called family-style dinners. Huge portions that serve four, not to mention it’s hardly anything that you would think is expensive and the food is excellent.

Patti: That is interesting. There you go, guys. Thinking about what an awful period of time, adversity brings out amazing creativity and solutions that many of these companies and these restaurants are going to continue to do because it’s what people want.

What else? Are there other retail outlets, other places – again, before, during, after – that you felt did a good job taking care of whatever it was that you were looking for, etc.? Jessica, this time I’m going to start with you. What do you think?

Jessica: I have a musician in my house and he loves to play the trumpet. We reached out, after the pandemic, to Taylor Music, because they’re a small family shop, and they were still open, and they provide good service. We took the opportunity to stay local.

It’s hard because Taylor’s is not able to use the Zoom yet to do the lessons and not everybody can play guitar and learn on a Zoom call.

Patti: Taylor’s, I’m so glad you brought Taylor’s up. That is a unique store in our community. That store was started in the year of the stock market crash in 1929. That has been around forever.

Then, in the 1950s, the father of the current owner – the current owners are Julie and Len Doyle – Julie’s dad stepped in. He was a music teacher at one of the high schools. They called him Mr. B. He took over Taylor music and supplied these instruments.

Even to this day, what I love about that particular business and all of the businesses is that when they have equipment that’s really used, etc., it’s not appropriate to sell, they donate it. They donate it to schools, elementary and middle schools, etc., so that young people can at least give it a try.
You never know when somebody might have a musical talent that nobody in the family realized, but they need the equipment to be able to do so. They’re very community-oriented. I got to tell you, like you, I have the kids. My sons love playing the guitar.

They would continue to go in there, get great advice. It wasn’t a pitch. Most of the time, they talked them out of the most expensive guitars, which I was happy about?

Jessica: Thank goodness.

Patti: They’re good, solid people. I appreciate you bringing them up, because we all think about the mall, etc. You know what? That’s a good question. I’m curious to ask all of you, and I want to hear from all of you in terms of the places, but as part of your answers, I want to know, is the mall dead?

Bernadette: Yes.

Jessica: Absolutely.

Patti: It’s dead? No kidding. Somebody, step up. Tell me why and tell me where you’re going instead.

Kristopher: My wife and I have competing ideologies on this a little bit. Before the pandemic, I wasn’t going shopping anyway. During the pandemic, I feel like things that happened with online shopping, free delivery, free return, faster delivery, all those things made shopping more convenient.

I don’t think I’ll ever step foot in brick and mortar again for things like clothes or whatever, because if I don’t like something or if it doesn’t fit right, I return it for free. It’s been made a lot more simple and streamlined.

Patti: Can I interject?

Kristopher: Yeah, sure.

Patti: I was forced to do that online stuff as well. I got to tell you, the stuff that gets sent to me doesn’t quite fit right, or the colors don’t look quite the same as they did on the screen.

I got to tell you, I’m not proud of this, but that stuff tends to stack up on top of each other on my dining room table. I tend not to bring it back. That’s a pain in the neck.

Kristopher: That is a pain in the neck. You’re 100 percent right about that. That’s something that it’s like one of those things you got to deal with. For me…

Patti: I’m going to interrupt you. Especially since you got to go online, go to their website, find the little teeny box that says “Returns,” figure out how you’re supposed to return it. They don’t make it easy.

Kristopher: You threw the box away a week ago when you got it, and then you changed your mind, and then you got to find the box. Sure enough, something will come through the mail again, and then you get a new box, and then you’re good.

Patti: Here’s a question. I get you, how about your wife?

Kristopher: She is a huge fan of the little boutiques. There’s a store in town, in West Chester, called Tish Boutique. Customer service is what brings her into the door there. It’s not a big store by any means, but they have a lot of nice stuff, unique items. She likes going there to look around and get ideas of what she wants to wear.

For me, I’m less of a fashion-forward type of person, so it’s like, “I know I wear a large. Click. I’m going to get that.” It’s a little easy.

Patti: I don’t know, Kristopher. You’re looking pretty good.

Kristopher: She dressed me this morning.

Patti: Attaboy. Good. Matt, what do you think?

Matthew: One of my favorite spots to go is Trail Creek Outfitters. They have this place in Glen Mills. They’re an outdoors store, so they sell equipment for hiking, and snowboarding, and have jackets and that sort of thing. They opened their second store in Kennett Square somewhat recently, right before the pandemic.

They survived through it as the community came together and shopped there frequently. It’s a great spot to get Christmas gifts. I feel like I’ve gotten my sister fuzzy socks from there for the past four years. It’s a good spot to get gifts.

Patti: No kidding. Fuzzy socks, Carrie Brennan, here you come. Good deal. Thanks so much. All right, Jessica.

Jessica: I can’t say I’ve done too much retail shopping, but Amazon would be where I would go for retail. The other kind of shopping I’ve done is obviously grocery shopping, and it went online. I can say I’ve utilized that pick your cart, schedule your time to pick up, or have the delivery person bring it to your front door.

Patti: That’s very interesting.

Jessica: During the pandemic, they pumped up that.

Patti: Did you have any trouble, in terms of being able to go online, get the orders in? Was it days and days before they could…?

Jessica: During the pandemic, it was difficult to find the right time for when you wanted your groceries delivered, or finding the groceries you wanted. There were a lot of shortages. Now that the pandemic’s over, it still works for me to do the online delivery.

Patti: Excellent. Bernadette, how about for you?

Bernadette: I definitely believe malls are dead. I’m with you, Patti. I don’t like buying things online. I’m tall, and inevitably, the sleeves are too short, pants are too short. The pro side of the pandemic with our wardrobes, as you know, it was…

Patti: Sweatpants.

Bernadette: From here up, we looked great, and from there down, we were wearing sweats. The online things I did buy were more sportswear geared. That is, across the board, an easy size.

Patti: Let’s talk a little bit about some of the services that we were receiving before the pandemic, things shut down, and then now, they’re back open again. Matthew, why don’t you step up and tell us a little bit about your experience, what you did, and what you’re doing today?

Matthew: My hair’s pretty important to me. As you could tell…

Patti: Let me tell you guys. If you’re watching this, you can see this guy’s got a head of hair. Wasn’t necessarily the reason he was hired, but certainly didn’t hurt.

Matthew: Before the pandemic, I usually get my hair cut about once a month. Once the pandemic hit, I had to get haircuts from my dad. He would give it to me, which didn’t turn out very well, because I usually to go to Cruisin’ Styles here in West Chester.

My barber, Dom, we went to high school together. He’s a few years older than me. They had to shut down from March until June. They had three months where they weren’t allowed to operate at all, weren’t even allowed to go into the shop.

Patti: Good for your barber. Good for them, because they are in a minority. Of the businesses that failed as a result of the pandemic, salons – hair salons and nail salons, number one and number two – those were the ones that ended up failing more than any other type of business.
That says a lot about the person who owns your barbershop and where you go. They’re good business people as well as styling really well.

Thank you so much. How about you, Bern? How’d you do it? We women, we tend to have to do our dye, and our highlights, and all that stuff.

Bernadette: I know. It was terrible. Vanity had to go out the window. Obviously, we weren’t getting highlights and our hair was all getting longer. I do want to give a special shout-out to the salon I go to in Newtown Square, Prive.

My heart went out to these stylists. We know we book six months out. Those appointments are sacred. Based on what was happening with the governor, they were sending rescheduling two times, three times, four times. They were trying to rebook people.

Then, they had to completely clean out their salon and put in the dividers. Every other chair could be used and only three people in at a time. They make all their money cutting hair and styling hair.

To your point, Patti, I don’t know that they were ever able to recoup enough in whatever stimulus payments went out. They suffered. The most I could say is I told everybody about Prive so that when things started opening again, they were hopping.

In terms of coloring, it didn’t happen. It was what it was.

Patti: You know what I’m hearing from all of you? What I’m hearing is relationships, the importance of relationships. It is so interesting. I know that during the pandemic, we wanted to do something special for the hospital, the frontline workers in the hospital. They were there working double shifts, etc.

At Key Financial, we made the decision as a company to get everybody in the hospital. We took care of lunch one day. It was the coolest thing in the world to be able to do. We called Carlino’s and asked them to cater a lunch for like 300 people.

I got to tell you, they rallied. They rallied, they pulled it together, they were incredibly generous, and they were so grateful for the fact that we called them and wanted to make sure that we were supporting a business in our own community.

They, too, suffered as a result of the lockdowns but have come out of it because of people like you and all of us who are listening to this podcast today.

If I can pull this all together for all of you, when it comes down to it, whether you’re starting a small business selling products or services, if you’re thinking about going out on your own, remember, we are all human beings. Relationships matter. They really do.

What is it that’s going to differentiate your business from everybody else? Is it going to be faster? Is it going to be of higher quality, lower price? Ultimately, it’s what we say to our clients, our customers that ultimately makes the difference in the end.

For all of you who are listening, let me take this moment to say thanks to all of you for doing so. It means a lot to us. We feel a special relationship to all of you. Thank you so much for the emails. Thank you for going to our website, asking the questions, helping us to make this content the kind of content that you want to listen to time and time again.

With that in mind, please, go to our website at keyfinancialinc.com, log on, go around. There are lots of resources there. There are white papers if you want to learn about certain things. We’ve got like 80 podcasts on all kinds of topics.

If you have a question, feel free. Send us what you’re thinking about. What would you like to hear about, what would you like us to address because we’re here for you. Thank you so much for joining us. I hope you have a great week. Take care.

Ep76: Covid and Courage – A Nation in Recovery

About This Episode

This is the “wrap up” episode of last year’s Covid-19 series entitled Covid and Courage. Patti concludes the series with an emphasis on our nation’s recovery. She addresses the recoveries of small businesses and the importance of knowing your corporate culture. Smart leaders have pivoted to be sensitive to the needs of their employees and their respective family situations. She shares her perspective as a CEO, and a consumer, with Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators, and professional athletes.


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

Joining me today is our recurring guest, Gregg Stebben. Gregg has been on our show more than any other guest because he is so good at what he does. He is a journalist. He has interviewed presidents. He’s interviewed incredibly famous people.

I can’t tell you how lucky I feel, and blessed, that Gregg carves out time to talk to me and all of you on subjects ranging from what’s it like to run a small business? How you’re doing during COVID. What’s this going to look like afterward? On, and on, and on.

Gregg, thank you so much for joining us again.

Gregg Stebben: Patti, it is great to be here. I want to make sure the point gets made that among the amazing people I’ve had a chance to interview, Patti Brennan is one of them. It was a remarkable interview. You rate right up there at the top of the list.

I’m thrilled to be here again today because the last time you and I talked was about nine months ago. I think it was in August of 2020. We were in the middle of the pandemic and the lockdown.

Look, I don’t mean to suggest by anything I say here that we know exactly how this is going to end even now. Back then, there were an awful lot of unknowns here. I was in the middle of a life transition. I was literally sitting in an empty house.

All I had was a folding chair and a folding table in my podcast studio because, when we were done with the interview, I folded the table and the chair up. My wife and I moved away.

I now live a completely different life in the mountains than I did nine months ago. I know lots of other people have lives that are very different, too.

I’m really excited to talk to you today about how those changes are going to continue coming, and what they’re likely to look like, and how we should both mentally, and I think financially, prepare for them because we’re seeing all kinds of things like supply chain issues, worker shortages.

Those are the kind of issues I’m really excited to talk with you about today.

Patti: Gregg, I have to tell you that it was so great to have you on the podcast throughout all of that because you were so wonderful. To be so open and transparent and share with all of us what you and Jody were thinking about, what you were going through, how that period of time gave you guys the opportunity to say, “What do we want our lives to look like? Do we want to continue on this treadmill that we’ve been on?”

You made some really tough life choices that led to you at this point where you are today. Led you to that chair and table with your podcast with us last August and in your new home in the mountains, living the life that you had dreamed of.

Thank you for sharing all of that with all of us. I’d be curious to ask you, how’s it going?

You made some major changes.

Gregg: First of all, last August when we last talked, my wife and I owned a large, beautiful house on a busy street in Raleigh, North Carolina. Raleigh, just this week, was named the top two cities in the country to move to. Lots of growth and activity there.

We lived on a pretty busy street and, according to the city, 30,000 cars a day drove past our house.

Patti: Wow, talk about a 180.

Gregg: Yeah. Today, we laugh and say three cars a day drive past our house. We’re living in the mountains of North Carolina near the border of Virginia and Tennessee. Life is literally completely different. It was going to be completely different because of COVID anyway.

I can honestly say, and I don’t mean to discount other people’s experiences who had really terrible hardships and maybe even continue to have hardships because of COVID. I don’t mean to discount the illness and the death at all.

For me, this was one of the best years of my life. I think the slowdown in our lives because of the lockdown enabled us to take the time and get the perspective.

What I’m really focused on now is looking at things that can help people have the best year of their life going forward. What are the consequences of COVID that have changed the world around us that people can really take advantage of?

I think one of those circumstances if you’re really smart about it, is taking advantage of the change and the climate around employment today.

I know that the worker shortage is a problem for a lot of businesses, but I think there was a story in the “Wall Street Journal” last week about how whatever the temporary pain may be, even for businesses, the end result may be a wonderful thing. We just have to be patient and roll with it, like we’ve been rolling through this COVID thing for the last 18 months.

Patti: I couldn’t agree with you more. It is giving all of us the opportunity to step back and say, “Gee, what really makes sense going forward?” I have a small business. I have 30 employees. Our culture and our business are dependent on clients who trust us to monitor their financial affairs.

In our business, we’ve got a unique culture where we can stand up and say, “Hey, what’s going on with John and Mary Smith?” or, “I see an opportunity for this particular client. Can you run the following numbers this way?” It’s a collaborative type of atmosphere.

I will tell you, Gregg, during the lockdown that was really much harder to do. It still got done, but it was clunkier.

In terms of productivity, the ability to serve our clients, yes, it got done. It actually took longer to get the same outcomes.

Now, here I am, the CEO of this business. To your point, and I’m reading your mind a little bit, we’re all looking at this and saying, “Gosh, it sure was nice being able to work out of the house. It sure is nice not having to deal with that commute.”

There are advantages and disadvantages to both the office environment and the remote environment. Each business and each person has to make choices that are going to work for them.

It might be dependent on your age, what season of life you’re in. You may have kids at home. It’s hard for young families to do this work thing. Showing up in the office every day. I think that, if anything for me, and I can just speak for myself, Greg, I’ve become much more cognizant of what our young families go through.

I can also tell you that, for me as the owner and the CEO, I have learned a lot and been hopefully much more open, and frankly am much more open to people just kind of…”Look, this is OK. Our office hours theoretically are nine to five, but it doesn’t mean you have to show up nine to five every single day.

By the way, life happens. Take care of your kids. If you want to bring your kids in, we have desks and a desking system now. We could have 15 kids working here, doing their homework with Mom and Dad doing their thing and standing over shoulders from time to time.

I renovated. We have an amazing kitchen. We’ve got ping pong. We’ve got lots of fun stuff. It’s very interesting how this culture has evolved, not in reaction, but frankly because of COVID and because of the lockdown.

It’s made me, as a human being, more aware of what might make it more fun, make it more attractive to come into the office so that people can do what they do in less time than it might take if they were remote.

Again, I’m always thinking win-win here, Gregg. That’s the most…I think that that’s the key here, is a win-win. What works for everybody, because we are a group of people. We are a team.

I’m reminded of what Simon Sinek said. He said a team is not a group of people who work together, it’s a group of people who trust each other. That’s a very big difference.

That’s what I found during the whole lockdown. I am so proud of how everybody rallied. It was amazing. I’m grateful. I can’t begin to tell you how grateful I am every single day, every single week I was thanking one person or another for going above and beyond. Not hyperfocused on the hours, nine to five, going out of their way when it really mattered.

I don’t know if that answers your question. It’s probably a really long-winded answer to your question, but I do think that, for many people, it has given them the opportunity to say what works for me in my work life?

How can I continue to contribute to the place that I call my work home while, at the same time, being true to my heart, true to my family, and live the life that I want to live?

Gregg: I think that’s a big part of what this Wall Street Journal article was driving towards, is that even though it may be hard to hire people today, as people are asking those questions of themselves, where should I be? Both in terms of what should I be doing and what kind of company that I want to work for.

I think over time, what companies are going to find is that the people that go to work for them stay longer, have more of their heart in it because they really chose it instead of just taking something.

I think the lockdown, for a lot of people, gave them a chance, just as I did, to say, “Wait a minute. What is it that I want here?” I’m curious to know, in you and your team’s conversations with your clients, do you hear your clients having those same kinds of conversations with themselves, with their partners, and even with their kids?

Patti: Absolutely. I do think that this is giving everybody the opportunity to sit back and say, “What are my alternatives? This works for me. This is not working as well for me. Where do I go from here?”

Not only, what can I afford to do, but where will I be most productive? Where will give me the most opportunity to be my best self and to make the biggest contribution?

When you’re making a big contribution to an entity, whether it be a business or a corporation, I can’t help but think that that’s going to be win-win for everybody involved. Does that make sense?

Gregg: It absolutely does. I think one of the things that this period of COVID did was make us all stop, and understand, and appreciate the humanity of all, not just ourselves or maybe the people in our small bubble.

I think seeing people’s expectations change reset so that, for instance, if someone promises you something and they come back and they say, “You know, because of supply chain issues or because of worker issues, I’m just not going to be able to provide that in the time that I promised. I promise I’m going to provide it. I promise I’m going to provide it as soon as I can.

“Circumstances beyond my control make it impossible for me to deliver the way I did before the whole COVID circumstance began.”

Patti: You brought up a great point. Those unmet expectations, those disappointments. That’s a tough piece of news to deliver to a client or a customer that you cherish. Yet, that’s the practical reality of what has happened.

To me, ultimately, it’s all about communication. It’s about transparency. It comes from the top, Gregg. Here’s what’s happening. Here’s why it’s happening. We’re going to work like the dickens to fix this as quickly as possible. We’re going to do it together.

If leadership, if senior management sends that message to their front line workers because it’s the front line people who are delivering that information and that bad news. For those people to know that they’re supported. That’s a place where people want to work. They’re proud. They feel empowered. They feel understood. They don’t feel like they’re so alone.

We dealt with that. We deal with that, frankly, every time a bear market occurs. It’s really tough. We get more phone calls. People are worried. I’m not answering all of those calls.

It’s funny because we had a new employee during March and April. I found myself going into their office, and sitting down, and saying, “Welcome to your first bear market.”

“It won’t be your last. How can I help you? What questions are you getting?”

This is tough. These are difficult times because we can’t guarantee the future. We don’t know for sure what’s happening. It’s important that you know it’s OK to say that.

Gregg: I think part of what you just said was that in the world of Key Financial, there are really two essential constituents or sets of stakeholders. I think in a lot of businesses there’s only one set of constituents or stakeholders. That’s the customer, the person who opens their wallet and buys something subscribes to something, becomes a client.

In your world, and I know this was true long before COVID, there were two sets of constituents. There were the clients, of course, but equally important, and it was important and essential to make the machine run the way it does, was that your employees are a set of constituents that are every bit as important as the clients themselves.

That, I believe, has always been the culture that you created. I think you should take some credit for that. I think you went through COVID very well because you built an organization the right way. You were prepared for anything.

Typically a bear market. In this case, a pandemic. Who would have ever expected that except maybe someone who had once been an ICU nurse?

Patti: I’m just doing what I would want if I were in their position because, at the end of the day, they are the company. In fact, that’s one of the things that, when I hire someone new, there are 10 statements that are typed out that I want this new employee to read, to understand, and then they sign it.

One of those statements is the following – To the client, I am the company. It’s that sense of ownership. With ownership also comes empowerment to give them the freedom to do what they believe in their heart is in the best interest of that client.

At the end of the day. I don’t know how this is going to come across, but yes, I do believe in hiring really smart people with great pedigree and background, etc. Frankly, that is probably the last thing I look for.

What I look for is heart, because when you have heart, when you really care, when you’ve got empathy, when you put yourself in that person’s position, it’s amazing the things that will happen because people will do things for people that they love, that we care about.

We’ll do things and go above and beyond far more than if this were just a number. If people were calling an 800 number, etc., that’s not what we are. That’s not how we will ever be.

Gregg: That leads me to my last question. In the world of Key Financial, because it’s such a hot topic for all businesses today, what happens next in terms of remote work, hybrid work, back to the office? How’s that going to work for your company? Do you have any advice for other business owners and people who are employees who are struggling with their own company’s policies?

Patti: I will tell you that, like everything else, we are figuring it out as we go along. Sometimes it’s hard to be a parent and sometimes it’s hard to be a leader. For me, I have to make some tough decisions, tough choices. I’m taking it day by day, week by week.

We still continue to have a flexible approach to this whole thing called remote work. I will tell you that we have a much more flexible approach to showing up every day, what’s going on at home, running out in the middle of the day, etc.

I think I may have said this to you last year when we were going through it, but my feeling is I don’t care when the work gets done. I just care that it does get done. I’ve added another statement to that. That statement is of the same standard and quality that makes Key Financial what it is today.

We can’t sacrifice that for convenience. That’s the spirit of all of this. Everybody gets it. They’re on board with it. What’s really interesting about it is they appreciate it.

I wear my heart on my sleeve, Gregg. I give it to people straight. I’m transparent. I wish I could just say, “Hey, go off. Do what you want when you want it. It’s OK.” I want everybody to like me. I want everybody to love Key Financial and working here.

Unfortunately, as with anything, there’s stuff that has to get done. Some of it does get done in the office. Ours is a relationship business. It is so important that our clients, who have trusted us with their entire life savings, know we are here. Most of the work that we do is behind the scenes. We are available whenever they need.

That face-to-face interaction is often really important, especially when people are going through difficult times. I will tell you that the Zoom meetings have been working out fantastically. I think that clients appreciate that. They appreciate not having to come into the office.

For existing clients who already know us, trust us, and need an update. We check in from time to time. That works out really well. Look at Jamie Dimon. He’s trying to figure it out. Big companies. Google trying to figure it out. Everybody’s in the same…

Gregg: McDonald’s is trying to figure it out.

Patti: Yeah, and ultimately those business models have to figure it out for themselves. McDonald’s, may or may not be able to have remote workers making burgers. I don’t know that that’s…

Gregg: It could be a problem, but they could have one remote worker who’s inside the talk box. That person serves 100 different locations. Have they tried that? There’s no reason why they couldn’t.

Patti: That is a really good point. Isn’t it amazing the creativity of some businesses and what’s happening?

We did a podcast earlier today. It was so much fun, Gregg. I wish you would have been on it because it was really a blast. Basically, I was talking about the before, during, and after COVID. I had four of our employees here in diverse seasons of life, from a recent college graduate to a young father, to a mother of three boys, and someone who has four children and is an empty nester.

We had four of them. I want to find out what were some of the establishments that they would go to, whether it’s restaurants, or retail stores, or even the mall. What did they do before? How did they adjust during COVID? What are they doing now?

The coolest thing that I learned from these four people, Gregg, was the importance of relationships. It was amazing.

For example, the stories these guys came up with. There was talk of a restaurant here locally that my employee went to every once in a while. During COVID, however, they had developed this system of a walk-up window, a drive-up window, easy, contactless, etc.

They got to know those people and now they go there all the time. The adversity, the difficulty, this restaurant got creative, found a solution, and as a result, their business is booming.

I think that, as with anything, we all will look back and say it was the most difficult time. It was also an amazing time for growth, an amazing time for perspective, for us to figure out what does life look like for the next year, 5 years, 10 years?

Ultimately, it’s about choice. It’s about what you want to have happened. Gregg, I can’t think of anybody that I know who is a better example of that than you.

Gregg: That’s very kind of you to say, but I would say, frankly, the same thing about you. I can’t tell you how thrilled I am to have this chance to come back and talk with you about life at this stage of the pandemic. Let’s hope that we’re on the long tail and it’s going to go away forever.

It has really been a pleasure to talk with you, Patti. Thank you for inviting me back.

Patti: Thank you, Gregg Stebben. Thanks to all of you for joining us today. If you have any questions, please feel free to go to our website at keyfinancialinc.com. I love to hear your comments. I love reading your questions.

We have the Ask Patty Brennen series that is specifically designed to answer the questions that you’re sending to us.

Again, Gregg, thank you for joining us, and thanks to all of you for tuning in today. Have a great day.

Ep75: What Issues Should Be Considered When Getting Married?

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked, but should be asked, question). In this episode, Patti addresses one of the most frequently asked questions by her clients…My son/daughter is getting married, “What issues should we discuss with them to better prepare them to be financially secure?” There are many financial pitfalls that can be avoided – whether it’s a first marriage or a second, Patti reveals the very important topics that must be discussed and the decisions that should be made to remain financially secure.


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.

As all of you know who have been listening and watching these podcasts, at the end of every show, I encourage you to reach out to us with any questions that you might have. It could be related to the podcast, or it could be random.

Over time, we’ve accumulated these questions and have started this “Ask Patti Brennan” series, quick vignettes that answer those questions directly and hopefully succinctly, even though I can’t say that word, and really just get to the bottom line. Excuse me, but my daughter is laughing her head off. Excuse me.

All right. Back to this. All right. [laughs] We’ll keep going. The question that we’ve gotten, several times by the way, is “My daughter is getting married. I’m getting married. What issues should I consider before we get married, as it relates to our finances?”

It’s a great question. This is one of those conversations you want to have before you tie the knot. Let’s just get it all out there because it’s not fun if you do it after the fact. First question is “How do the two of you handle your finances? How do you feel about debt?”

One person may be OK with credit card balances and just paying the minimum balance every month. The other person may feel like, “Oh, you’ve got to be kidding me. I couldn’t function that way. That would just hang over my head.” Let’s have a conversation.

Those things are important. Is one person coming into the marriage with more assets than the other person? How do they feel about that? Do you want to combine your finances? Everything is individually held right now. Do you want to combine and put everything in joint names? What are the pros and cons of that?

If this is a marriage that is later in life, does a prenuptial agreement make sense? That’s one of those conversations that’s tough to have because you don’t want to think about this as a business arrangement.

Yet the fact of the matter is that you do want to consider, especially if it’s a second marriage and especially if there are children involved from a prior marriage, what that would look like if this didn’t work out because there’s a lot at stake.

It’s not just money. It’s also feelings. There’s nothing worse than a child feeling like, “Gee. Dad got remarried, and his second wife inherited everything.” It’s not even necessarily the money. It’s “I guess I wasn’t that important.” Just think those things through a little bit. Determine whether or not a prenuptial agreement makes sense.

Again, are you coming in with two homes? Are you going to move into one person’s home, or are you going to sell both homes and just buy a jointly owned property? That’s also really important. How do you feel about different investments? How do you feel about saving money?

Is it really important for you to fully fund your 401(k) whereas your future spouse might say, “Yeah, I don’t really care about that. That’s 35 years from now. Let’s live for today.” That’s a very different philosophy. Let’s get it all out on the table and find a happy medium. Honestly, you’re both right. There’s no right or wrong in this. There are just consequences of those decisions.

By the way, not making a decision, not coming to an agreement, is making a decision. Don’t let inertia stand in the way. Don’t worry. I think you’ve got to be careful to say, “Well, this is too sensitive. I don’t want to be talking about these things. It’s not a business arrangement.”

Fast forward 5 or 10 years. You’re struggling to make ends meet. You’ve got three kids. You’re thinking about college education. These things, money is often the reason why people actually split up.

Think about your tax planning. Are you going to file married, filing joint? If that’s the case, that often makes sense from a numbers and cents perspective because the tax law does favor married filing jointly versus married filing singly.

We had a client who one spouse was in business for themselves. They were getting a divorce. Alimony was on the table. When alimony is figured out, it’s figured out based on the difference between both spouses’ incomes.

The person who was self-employed, their income looked a lot lower because they wrote off a lot of stuff. They wrote off their car. They wrote off their office in the home and a lot of things and meals and things of that nature. Their net income from their business looked a lot lower than the actual cash flow coming into the household.

If you’re signing that tax return, you’re signing off on the accuracy and the validity of those deductions. Guess what? That net income is what alimony is going to be calculated on. Again, in a divorce – you don’t go into these things expecting to get divorced – just understand that that stuff is all on the table. It is part of the negotiation during the divorce process.

Take a look at, on a more positive side of things – because you know me, I love to be on more positive – what about the insurance issues? Does one spouse have better insurance than the other? I should say future spouse. You want to look into that stuff because it could be meaningful. Same thing with disability.

How about the cars? How do you want to title your cars? Again, think about the insurance issues. Depending on your ages, do you want to have a family? Do you want to get the insurance out of the way, get it while you’re young and while it’s cheap?
Those family considerations are also part of that conversation because, again, having children can be a rather expensive endeavor. It all comes together in the conversation.

How will the cash flow needs actually change? What’s important? How do you want to spend your money? Do you want to spend your money together on making a beautiful home, or are vacations more important? It’s as much a values conversation as it is a financial one. Just get it all out on the table so that it doesn’t become an issue after the fact.

Again, you just see how your thinking aligns and how this marriage…It’s not only a marriage of two individuals who love each other. It’s also a marriage of your finances. Keep that in mind as you go forward. Don’t be afraid to have the conversation.
You may be tentative. You may feel like you don’t want to bring it up. Yet your future spouse is probably thinking the same thing. Have the conversation. Who’s going to be in charge of paying the bills? Who’s gathering all the information to do the taxes every year? Let’s just talk about it.

Again, these things, lots of things to consider. If you have any questions, feel free to go to our website. We’re here to answer these questions for you. What are some of the additional issues I should consider if I’m thinking about popping the question? I am Patti Brennan. Thank you so much for joining us today. I hope you have a terrific day.

Ep74: What Issues Should Be Considered When Buying A Home?

About This Episode

This episode is next in the new podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (Rarely asked, but should be asked, question). In this episode, Patti addresses the first issue of how to come up with a down payment and what, specifically, the lenders are looking at. She also warns against big mistakes that buyers make and how they can be protected from them. This is a must-listen podcast for anyone looking to jump into the hot real estate market right now by buying their first home or vacation property.


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.

For those of you who are tuning in today, you probably know that at the end of every podcast, I encourage everybody to just go to our website. If you have any questions, just send us your questions because from time to time, I will record the answers. That’s what we’re going to do today. It’s called the “Ask Patti Brennan” series.

The first question that I’m going to tackle today…By the way, these are shorter, direct. Here’s the bottom line. The first question is “What are some of the issues that I should consider when I’m buying a home?” A lot of times, people just focus and, I will say, hyper focus almost on the mortgage.

First question I have is “How are you going to come up with a down payment? Where’s that money going to come from?”

If it’s coming from a gift, you’re going to need a gift letter from the person who is giving you that money because there’s no lender in the world that’s going to lend you even 80 percent of the value of the purchase of the home without a really good understanding of where’s the other 20 percent coming from. That’s first and foremost.

Also, when you think about where we are today, you’ve probably seen it. It’s a mania out there when it comes to real estate. There are a lot of people who want to buy but not a lot of people who want to sell. What’s happening? The prices are going up. People who are putting their homes on the market are not just getting their asking price. They’re getting 10, 20 percent above.

If you’re looking for a home, whether it be a primary or even a vacation home, you’ve got to go into that whole situation understanding what tippy-top really is. Once you get into that mode, emotions take over. I’m finding that a lot of people are going way, way over budget.

The fact of the matter is the cost of a home is not just the monthly mortgage payment. It is the monthly mortgage payment plus some real estate taxes plus the insurance. I think you probably already know that.

What about some of the other stuff? For example, utilities, renovations that you might want to do. If it’s a vacation home, where is it located? If we’re in Pennsylvania and you go buy a place in Florida, how are you going to get there? You’ve got to add that into the cost of the homeownership in terms of what’s the all-in package and then model that based on your personal situation.

Let’s fast forward and say, “OK, we’ve got the number. We’re looking for the mortgage. What are some of the considerations?” There are two ratios that are really important when you go into something like that. The underwriters for any lender, they’re going to be looking at basically 28 percent and 38, 30, 28…Scratch that.

Now, we’re going to go into the mortgage situation. You’ve got your boundaries. You understand what your limits are. What about the mortgage? What are the lenders going to be looking at? There are two ratios that are critical to keep in mind. The first is 28 percent. The second is 36 percent.

A lender is going to be looking at your sources of income. They don’t want you to be spending more than 28 percent of your gross, which means pre-tax, your gross monthly income, on your mortgage payment, which includes real estate taxes and insurance. 28 percent for that.

The 36 percent, for those of you who may have car loans and student loans, they’re not going to lend you more than 30 percent of the total of all that combined with the mortgage payment. Those are the two ratios to keep in mind.

Really, that’s a pretty good rule of thumb. That, again, would be tippy-top. Again, we’re talking gross, pre-tax. You’re not keeping all of your income. Figure out what your tax bracket is. Let’s say 25 percent is coming right off the top. You’re only living on 75 percent of your income in that case. Again, you want to understand the impact of this new property on your personal situation.

As you go into this, if it’s a new home, if this is your first home, you’ve got to remember you’re going to want some furniture. There’s going to be some big-ticket items that come along with that. Even something as, I mean, not dumb but putting in cable, cable TV, the Internet cost, things of that nature, that stuff really adds up.

Some of it is going to be one-time costs, but if you’re putting absolutely everything, everything into your down payment, how are you going to pay for that? I will tell you, you don’t want to be doing that on credit cards. Don’t get yourself into that situation. Understand, upfront, the total, all-in cost of purchasing either a primary or a secondary residence.

What’s it like applying for a mortgage today? If you know anybody that’s done it, it is not fun. It’s just gathering all the stuff, two years’ worth of tax returns, pay stubs, a statement from absolutely every account. It is a painful process. That has not changed since the financial crisis, so just be prepared.

I think that as you go into this also, this is not the time to be adding a credit card. It’s also not the time to be closing a credit card because that has a negative impact on your FICO score. That’s another thing that the lenders are going to be looking at.

I think about different ways to fund your down payment. You’re looking at the situation. You really want to get this real estate. Let’s say that your employer said, “Hey. Guess what? You don’t have to come back to the office anymore.” You want to go to a different place and get a nice house way out in the suburbs, etc. How are you going to fund the down payment?

First, understand the rules as it relates to IRAs. If you’ve had a Roth IRA for five years or longer, you can take up to $10,000 out of that Roth even though you’re under 59 and a half and not pay a 10 percent penalty. Because it’s a Roth, you’re not paying tax on the gain either.

Option number two would be to go to a regular IRA. Again, first-time homebuyer, no 10 percent penalty, but you will pay income tax on your gain.

Scratch that Roth thing because you do have to pay tax on the gain on the Roth, I think. There’s just no…Let me go back to that. I forget what the rule is.

Oh, your contributions. Got it. Fast forward. You’ve been approved for the mortgage. Where are you going to come up with a down payment? Assuming that your great aunt is not gifting you a significant amount of money, you may have different buckets that you can pull from.

If you have a Roth IRA, understand what the rules are. As long as you’ve had that Roth for longer than five years, you can take out your contributions completely tax-free. There is no 10 percent penalty even though you’re under 59 and a half.

If you have a regular IRA, same deal applies. You can take out up to $10,000 for your first home purchase. There is no 10 percent penalty, but you do have to pay income taxes on the amount that you’re pulling out of the IRA, the $10,000.

If you have a 401K, many employers provide for borrowing privileges. You can take a loan against your 401K. That gives me a little bit of a heebie jeebie. I’m not a real big fan of that. I’m not a big fan of actually pulling out of the IRAs either. It’s really if you absolutely have to pull money from somewhere. I’m just giving you the rules.

I would much rather you wait. Understand that you need to fund this down payment and save for it outside of your retirement plans. Real estate is going to go through different cycles. Right now, we’re going through a crazy cycle where everybody is just out there looking to buy anything.

That’s going to calm down. There actually may be better opportunities going forward when things calm down a little bit. I understand that you’re worried, probably, of rising interest rates, that the mortgage rates are going to go up.

I’m not as concerned about that. Yes, they may go up a little bit. I don’t see them going up to six or seven percent, so it may make sense for you to take your time.

By the way, if you don’t see yourself being in this property for five years or longer, you’re going to find, or at least I’m going to tell you, renting is usually a better deal. Really think long and hard, especially in this environment.

From a tax planning perspective, recognize and understand that mortgage interest over $750,000 of debt is no longer tax-deductible. Again, don’t want to let the tax tail wag the dog. That’s not why you’re buying the real estate. Especially if you’re buying an expensive home or vacation home, 750 is your limit in terms of what you’re able to write off.

If you are working from home, if you are self-employed, just make sure that your office space in this new home is literally separate. You don’t necessarily have to have a separate entrance, although that always looks and feels better from the IRS’ perspective, but it does need to be used exclusively for business use.

I guess the only other thing that I’d like to bring up are some of the insurance issues. Keep in mind that you’ve got this new, beautiful home. Please consider an umbrella liability policy that umbrellas both your car insurance, your auto insurance, as well as your home, to cover those unfortunate things that can happen.

Even as wonderful as you are in taking care of your property, people trip. They fall. Unfortunately, they’ll sue too. An umbrella liability protects your other assets and is really important as you consider this.

Actually, I have one more thing, guys. You know me. I’ve always got something I’m pulling out. The other thing to think about is the titling of the property. If you’re married, is it jointly held, etc.?

Then also, it’s really also going to be important to update your will, your powers of attorney, things of that nature, because now you’ve got a real asset that needs to be considered in your estate plan.

I think that pretty much covers it. If you have questions, again, go to the website. Send me an email. I’m happy to help, any way I can. In the meantime, thank you so much for tuning in today, and I hope you have a terrific day.

Ep73: Implications of Biden’s Tax Proposal: The American Families Plan

About This Episode

The latest large proposal of the Biden administration is The American Families Plan. The debates in creating this large tax plan are huge, everchanging, and cross party lines. Patti meets with Bill Cass, the Director of Wealth Management for Putnam Investments to discuss the implications of the proposal as it looks now in the summer of 2021. They discuss the tax law changes that will most likely get passed later this year, as well as the proposed changes that are rumored to be eliminated from the final proposal of the bill before it is passed. Patti and Bill share how high net worth individuals, corporations, and anyone with an estate plan that involves gifting and Trusts will learn a few surprises that may come with the President’s new tax proposal.


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 Bill Cass. Bill is the director of wealth management for Putnam Investments.

Bill and I were having a fascinating conversation. Probably more like sleep therapy for a lot of you, but we were talking about President Biden’s tax proposal.

Bill brought up a few things that I thought would be really important to share with all of you because there’s a lot of misinformation, a lot of rumors in terms of what’s actually in this proposal. It’s really important that you know, what is and isn’t there to do your planning appropriately. Bill, thank you so much for joining us today. Welcome to the show.

Bill Cass: Patti, thanks so much. I’m really excited. Again, thanks for having me on.

Patti: You got it, absolutely. No, thank you, because wow, that conversation we had was fascinating.

Here’s a question for you. When we were talking, this proposal is very different than what Biden ran his campaign on. What’s actually in it versus what did he talk about in his campaign?

Bill: I think Patti, the proposal we’re talking about, just so everybody’s clear, is the American Families Plan. This was the latest large proposal coming out of the White House. Yeah, I guess the good news, Patti, is it wasn’t as onerous or as negative as some of the tax provisions that were being discussed during the campaign season. That’s the good news.

For example, there was a lot of talk that taxes were going to go up for people with over $400,000 in income. That wasn’t clear on whether that was individuals or married couples, but that was the threshold.

There was talk about the state law changes to the gift and the estate tax. Then there was actually some talk about increased payroll taxes, at least for some higher-income folks. This is subject to change, but at this point, none of those things happened.

What they did, Patti, in terms of the income tax increases, they took a look at the top tax bracket, which is 37 percent and that kicks in at about 525,000 for individuals and 625 for couples. What they’re proposing is reverting back to the rate that was in place before the 2017 tax law. Going from a 37 percent tax rate at the top end to 39.6.

Again, if they talked about a $400,000 floor and we just didn’t see that. At this point, they’ve taken the estate and gift tax changes off the table in terms of lowering what we call the annual exclusion amount. The amount you can either gift while you’re living or leave, pass in terms of property you get death without being subject to federal gift and state taxes.

Patti: OK, that is a big deal. Let’s break this down a little bit, because there’s a lot there. First of all, on the increase in the rate, what I think is important that everybody hear, in terms of what you said, was that right now that top rate doesn’t hit, let’s say joint filers until they’re earning $625,000. It’s just on the excess over that amount.

Bill: Correct.

Patti: What they’re going to do is they’re going to flatten that bracket, if you will. From $400,000 and above, that’s when you’re getting hit with that 39.6 percent. It’s not just the extra 2.6 percent over and above incomes of 625. They’re adding that extra $225,000 and hitting that as well. Right?

Bill: No, that is what was proposed during the campaign, but that’s not exactly what we saw happen. If you look at the tax brackets today, all they’re doing is changing the 37 percent bracket to 39.6. That’s all that’s been proposed at this point.

Patti: Well, you know what…

Bill: None of the other brackets are changing. There’s a 35 percent bracket and a 32 percent bracket and so on and so forth. None of the other brackets are changing. I guess the good news is, if I was a married couple making, maybe a little bit more than 400,000. Unless we have income above, actually 628,000, this proposal, let his hands out, would not affect me.

Patti: There you have it right there. Here I am a Certified Financial Planner, I am going nuts reading absolutely everything that I can about this new tax proposal and I read differently. There you hear it from the expert, Bill Cass. For those of you who are listening, keep listening, because there are additional things that are out there that are just not true, at least in this proposal.

Bill: Patti, if I could say, the ultimate caveat, what we’re talking about, tax is subject to change.

Of course, as we know, permanent tax law is an oxymoron. It doesn’t exist. It’s always fluid in some respect or another. We could see changes that changed that tax structure, but this is where we stand, what we know right now from the proposal that was introduced by the Biden Administration.

Patti: The other thing that you brought to light was all of the draconian changes in estate tax law. Reducing the amount that we can leave to anyone or the next generation, leaving that dollar amount, or reducing that dollar amount from $11.7 million down to $3.5 million.

On top of that, changing the amount that you can gift during your lifetime from that same number, $11.7 million down to $1 million per person, that’s it. That’s all you can gift over and above that $15,000 number. That is not in this proposal.

I’m curious. Can you explain to our listeners and people watching today why did they remove that, because that feels like it goes along with, “We’re going to have the wealthy pay their fair share”? How come they removed that part?

Bill: It’s certainly a policy objective of the Democratic caucus and the Democratic leadership. A couple of things. First of all, I was pretty skeptical that we would see a proposal bringing it down to $3.5 million on the lifetime estate exclusion, and $1 million on the gift.

In my mind, I thought a floor was going back to the numbers in place prior to the 2017 tax law changes, which would have been, let’s call it $5.5 or $6 million, maybe a little bit more if you’ve been taking the impact, inflation adjustment.

I was skeptical that we were going to go down as low as $3.5 million. I’ve been wrong before, I’ll be wrong again, but what we’re hearing from some of our key contacts in Washington was that they looked at it and they said, “Do we want to fight this political battle?” I mean “we,” meaning the Democratic leadership and their caucus.

“Do we want to fight this political battle of addressing the estate tax where, you know what, we might not have full support amongst the Democrats in the senate, for example? If you look at it, the numbers are slated to revert back to the pre 2017 numbers anyways after 2025.”

From a political standpoint, they looked and said, “What’s the cost benefit of this? The numbers are going to change anyways, so why are we going to expend political capital potentially to try to go in that direction?” That’s where everything shook out.

Patti: It’s interesting. It’s very important that you and I pause here for a moment and recognize that whether it be Democrat or Republicans, etc., what is the goal here? The goal here is to do some things with our nation that need to be done. It is the roads, the bridges, the infrastructure, the electric grid. These things do need to be fixed.

I got to tell you guys, two weeks ago, Bill, I was driving to work and I hit a pothole, and my tire blew. I’m thinking, “Gosh, will they fix these darn roads for crying out loud?” There are a lot of things that do need to be done to make our country safer. The supply chain, what happened with pandemic? We couldn’t get cotton swabs and things of that nature.

Those things do need to be changed. That’s on the one end. On the other hand, I’m also reminded of something that Winston Churchill said. He said, “We contend that for a nation to tax itself into prosperity is like a man standing in a bucket trying to lift himself out by the handle.” That doesn’t make sense.

If I may say, and again, this is the other side of the argument. I’m not saying one is right, or the other one is right, we are the wealthiest nation in the world. We have trillions. Is it $200 trillion, is it $300 trillion of net worth in this nation?

Yes, we have rising debt, yet we are still the wealthiest nation in the world. Does it make sense for the government to tax the wealthy, tax our citizens to this extent? I’m throwing that out there. How do we solve these problems that do need to be solved in a logical way that’s fair for everybody?

Bill: Patti, back in the Dark Ages decades ago when I was a freshman in college, my economics professor said, “There’s no such thing as a free lunch.” It’s great to have these spending priorities, and that there’s a lot of infrastructure needs.

There’s other spending priorities around education, healthcare, and paid family leave, which are all very positive things, but there has to be some revenue on the other side to pay for it. I look at the big picture, and anecdotally, I look at it, it’s almost like…Patti, have you been to one of those diners that has a million things on the menu?

Patti: Yeah.

Bill: Got this huge menu, right? We’ve all. They could serve breakfast 24/7. I think of that in terms of tax and spending policy.

On one side, you have all these spending items and they all cost something, and they’re all ranked and they all have dollar figures associated with this. The lawmakers, at least their staff members, they have access to this information. On the other side is this menu of items of tax items and how much revenue presumably those are going to bring in.

It’s all about looking at these menu items and saying, “I’m going to pick number 1, number 4, number 7, and number 10 on the spending side, and then here are all the ones I want to pick on the tax side.

I highlight this because it’s going to be a long, drawn out process as we get into the real tax writing work at the committee level in Congress, and that’s going to be in the House, it’s going to be in the Ways and Means Committee. In the Senate, it will be the Senate Finance Committee.

For some people that are expecting a lot of clarity this summer, this thing’s going to drag out to the fall and maybe even rate to the end of the year. That’s my personal opinion anyways.

Patti: Here’s the question that everybody’s asking us, and I will tell you, what I’m saying, do you think they’re going to make it retroactive?

Bill: I get that question a lot both from professionals like yourself and your clients. That’s certainly not our base case. The last time we saw a retroactive tax increase was during the Clinton Administration.

What happened sometime in the middle of the year, they made a slight, a tweak in the estate tax that the actual rate, the rate went up from 40 percent to 45 percent, or something along those lines. That was effective the date of that proposal mid year, but since then, we’ve not seen any retroactive tax increases.

We’ve seen retroactive tax decreases, net positive to the taxpayer. We saw this in the early 2000s in the Bush Administration where people got refunds, but it’s certainly not my base case. The one question I’m getting…We talked about income taxes, Patti, but we haven’t talked about capital gains taxes, and that’s also on the docket. Could they…?

Patti: Let’s explain that. Talk a little about that.

Bill: Let me take you through the proposal, and then what I’ll do is give you my two cents on what I think is more likely in terms of capital gains.

The proposal outlined by the White House as part of this American Families Plan would say, “If you’re making more than a million dollars, if you’re at that level, whatever capital gains – and actual dividends apply as well – capital gains and qualified dividends, we’re going to tax that as ordinary income.”

That’s same as your wages, it’s the same as interest from a CD at the bank, or anything. That would be as high as 43.4 percent. That gets people’s attention. When you’re talking today, the most you’re paying on a capital gain, a long term capital gain is 23.8 percent.

Now, you’re telling me for some people…Granted, it’s not a lot of people at a very high income level, but going to 43.4 percent is a pretty stark increase.

Patti: It sure is.

Bill: I don’t think that’s going to happen. I do not believe they have 50 votes in the Senate to pass that. Remember, if they’re going to pass tax legislation, tax increases, they can do that with only 50 votes in the Senate if they use the budget reconciliation process, but I don’t think they have the 50 votes to do that.

Senator Menendez from New Jersey, Senator Warner from Virginia, Senator Manchin from West Virginia, they have indicated that they’re not on board with that stark increase, but could we see capital gains going from a max of, let’s call it, 23.8 percent for some taxpayers to 25 or 28 percent? That would be a more likely scenario in my estimation.

Patti: Yes, that’s exactly what I’ve heard. Do you think that they would apply that lower rate to a broader base, maybe cut the million dollars and above down to $750 and above to make up that revenue? Is that a possibility?

Bill: It is a possibility. I go back to the diner menu, Patti, and then they start tweaking it. As we progress further on in this process, and the lawmakers start prioritizing what they want to do, and you might need an extra $20 billion worth of revenue, how are we going to get that $20 billion worth of revenue to offset some other additional cost?

What if we tweak this? What if we change this? What if we turn the dial on this particular provision? When you get to that fine tuning, that’s where you might see some of the stuff, but I don’t think we’re going to be looking at a 43.4 percent rate at the top end for long term capital gains.

Patti: One thing that I was surprised at, and you can verify this or not, the 1031 exchanges for real estate. They’re talking about getting rid of that for people who want to buy up and defer the capital gains on their properties, rental properties, things of that nature. That was a surprise to me. I did not realize that that was something that they were looking at.

Bill: The 2017 tax law scaled back 1031 exchanges, not in terms of real estate, but with equipment. In the tax code, previously, you could apply that same option. If you were heavy construction equipment and you were exchanging it for some other type of equipment, you could defer any type of capital gains.

I don’t know how much of that was used frankly, but they did get rid of that, but they didn’t touch real estate. Now, with real estate, if your gain is over $500,000, it’s going to change the calculus for some folks that own rental properties that, as you know, and I’m sure some of your clients have used, have benefited from tax deferral.

Patti: Oh, yeah.

Bill: It’s a way to create some liquidity in that market. If you know you’re not facing taxes, you can exchange out it from one property to the next. You’re right, Patti. I’m interested to see how that’s going to play out.

Certainly, the real estate lobby is going to be working hard in Capitol Hill to educate lawmakers on that, and they’re going to make their case, right? They’re going to make their case that this is going to have detrimental effects that are going to have a broader impact. We’ll see how it plays out, obviously.

Patti: It’s interesting because as this information gets out, it’ll be fascinating to watch, whether or not it accelerates this real estate boom that we’re seeing. Houses are being sold for significantly above asking price. People think that that 1031 exchange is going to be repealed.

You’re not going to be able to do it. I wonder if this is the year that people go and buy up to the next property to the next level – second homes, vacation homes, things of that nature.

Bill: Commercial real estate if I own a part of a strip mall or what we call them in the Boston suburbs, these triple deckers, these rental properties that ubiquitous to the Boston area. Certainly, it’s going to change some…I’m thinking on it.

I think also with business owners, if I’m a business owner, and I’ve been in the process of planning out my exit strategy, one of the things I’d be thinking about if I think the capital gains rate is going to go up a little bit. Maybe, that makes the case for doing more of an installment sale and spreading that gain over a number of years. It’s going to be interesting to see how it plays out.

Now, the planning is really difficult because you want to be cognizant of these changes, but you have to understand that we don’t know what’s going to happen or if anything’s going to happen, at all. That’s the difficult part about planning for this stuff.

Patti: It is so tough, Bill, because the fact of the matter is no matter what we do, there are unintended consequences to everything, right?

Bill: Correct.

Patti: Let’s say that somebody is at that high income level, and we’ve had these phone calls already with people. I got a software program to help us calculate. Does it make sense to prepay the capital gains?

Let’s just sell everything, pay the 23.8 percent, reset the cost basis and move on from there. But then this way, you’ve cut the tax bill significantly. What’s the time value of that tax money not remaining invested? How many years does it take to make up that difference? It’s really interesting.

I would never want to prepay capital gains taxes. If you don’t need the money, just leave it there. Yet, those people are like, “Well, I don’t want to be paying 43 percent on my gains,” and I understand that part too.

Bill: I go back. The 43 percent – anything can happen within reason – I do think that’s really an outlier. Patti, I’m sure you remember. As we got to the end of 2012, we had this fiscal cliff, and no one knew what was going to happen in terms of the tax structure at the time because there were expiring tax provisions including the estate tax.

There were folks I talked to advisors like yourself that had clients. They gifted aggressively at the end of 2012 thinking the estate and gift tax numbers were going to change for the negative beginning in 2013. Those numbers didn’t change. Eventually, they even got better to do the 2017 tax law.

There’s people that gifted aggressively back in 2012 that are sitting here eight, nine years later thinking, “Oh jeez, I shouldn’t have done that. That was a mistake.” There’s no easy answers is what I’m trying to say.

Patti: Bill, to that point, the key here with all of this is to run the numbers. If you do Option 1 versus Option 2, what could it look like if what they say exactly as they are today versus if they changed? Could there ever be that point in time where you look back and say, “Gee, I wish I hadn’t because that’s not fun. That is not a good thing.”

Ultimately, the real litmus test for all of that is you just want to make sure that you’re going to be financially secure for the rest of your life no matter what. That is first and foremost with all of these strategies.

Speaking of a dramatic change, getting back to the estate law is the repeal of this loophole that we have currently. I almost hate to call it a loophole because it’s so important for so many families, but the step up and cost basis roll.

Bill: You’re right. Interesting point that you see a loophole. I don’t see it as a loophole because you have potentially folks that you owe and pay federal estate tax, but then you’re also going to tax them additionally on the gain in those assets as well. There’s a little bit of science behind the structure in terms of trying to avoid, at least for some people, double taxation.

Patti: That is an example of capital punishment by confiscation.

Literally, Bill. Am I wrong? It could add up to what? 70 percent of the underlying assets goes to the government in one tax or another. That is something that could be a little scary.

Yes, there is on the first million dollars of gain. The proposal currently says, “On the first million dollars, we’re not going to tax that, but anything on top of it.” It doesn’t take long for people’s gains over their lifetime to exceed a million dollars.

Especially when you consider real estate and assets that they may have held and decided, “I’m going to keep on holding this and use my retirement account instead, because at least, that gets that step up and cost basis, and the kids don’t have to pay a tax on the gain.”

It’s devastating. It could be devastating for our business owners, people who own businesses. You got a business for a lot of people that is the lion’s share of their net worth. They’ve got a business, they’ve put everything into it, their sweat equity, as well as reinvesting into the business to grow it, and then they die.

They might have a little bit of liquidity in a 401(k), but if the business is subject to a significant tax, what do you think the business owner or the family has to do? They have to sell the business, excuse me, but they’re not going to get top dollar.

That’s where the word fire sale came from, because everybody knows that the business is being sold because the family has to sell it because they have to pay the tax within nine months. That could be devastating.

Bill: Patti, I’ll give you another example, too. Probably, in your neck of the woods, you think about folks that have families that have places on the Jersey Shore up here in my neck of the woods outside of Boston in Cape Cod, or up in New Hampshire and Maine.

We’re talking about families that aren’t extremely wealthy but might have that multi-generational family home. It’s been in the family for 50 or 100 years. Who knows what the cost basis is, right?

Patti: Right.

Bill: That could be real problematic to folks in that type of scenario. If you’re going to tell me at the death of whoever owns that piece of real estate now, there’s going to be a capital gain realization at death. That’s the bad news. The good news Patti is…

Again, I don’t have a crystal ball, but I’m still pretty skeptical on this effort to repeal stepped-up cost basis of death. There’s growing movement among some lawmakers, especially in the rural areas, we’re talking about family farms, that have come out against this.

Certainly, there’s going to have to be carve-outs and exclusions, but the more complicated it gets in terms of carve-outs and different exemptions, the more complicated it’s going to be for the IRS to try to enforce it.

This is the type of tax provision that is going to be tough to enforce, it’s going to be complicated, and I’m not sure that they’re going to get enough support within the senate to have it proceed as it’s currently written.

Patti: You know, Bill? As you were talking, I was thinking about this. Maybe the timing isn’t right also, because this law that requires mutual fund companies and brokerage houses to keep track of cost basis, that was passed in 2012.

There are a lot of people, there are a lot of investments out there that were purchased way before that, and people don’t have a clue what the cost basis is. How are they going to account for that properly?

It’s one person’s opinion, “How are they going to prove it one way or the other?” but the further out we go, the more data they’re going to have to be able to enforce something like that.

As you were talking, I’m thinking, “You know what? They’ll probably throw everything up against the wall, that included, recognizing that that probably won’t go through.” I think that everybody listening today might want to expect that that could come back in the future. To your point, there could be some carve-outs. That would be the right thing to do because this is America, and what do we do without our businesses?

Bill: Valuing closely held family businesses, Patti, that there’s as much art to it as science in a lot of cases. Not to say that it couldn’t happen, because basically, that’s the Canadian system.

In Canada, they do tax with some limitations and some exemptions, but they do tax. Once it goes to someone other than the spouse, they do tax capital gain property at death. Now, they don’t have an estate tax in Canada, so they pick one or the other.

If you remember that quirk in the tax code for people who passed away in 2010, technically, there was no federal state tax in 2010. People could opt out of paying the federal state tax, but in lieu of that, they did not get a step up in cost basis. It was one or the other.

Patti: What’s interesting about that, it’s different. Correct me if I’m wrong on this. In that one, they didn’t get the step up, but cost basis. However, it wasn’t that you had to recognize the gain at death and pay the tax, is that right?

Bill: Absolutely. It was what we call carryover basis, the same principle that would apply. If I gifted you appreciated stock, Patti, you would inherit my original cost basis if it’s a gift while we’re living. You’re right, it was carryover basis, but lawmakers look at taxing those gains at death, and they look at, “Go back to the diner menu.”

That brings out a heck of a lot more money from a revenue perspective than it does if you say, “You’re not going to get step up. We’re not going to tax you with death, but you’re not going to get step up. It’s going to carry over to your heirs, and when and if your heirs end up selling that property, they’re going to have to pay that capital gain,” but you’re absolutely right.

Patti: It is really interesting. We’ve talked about the problems. Now, let’s focus on the solutions, especially given the fact that the estate tax changes are not in this bill.

We were talking last week, I’m getting a lot of phone calls about this, people setting up these spousal lifetime access trusts with the thought that, “I want to take advantage of the 11/7 while we still have it.

“If they take it away, if I gift it, if I gift 11/7 to my spouse, put it into trust for my spouse, at least with the end beneficiaries being the kids or someone else, at least I’ve used up the full 11/7 before we take it away.”

The downside to that potential tool is that when you gift during your lifetime, as Bill said, there is no step-up in cost basis. Yes, you’re preserving that unified credit exemption, but somebody’s going to pay the capital gains tax in the future.

There is no free lunch as it relates to this stuff, and you got to understand, and it is important to understand the unintended consequences, and make sure that this is a problem that needs solving, right?

Bill: Right.

Patti: We don’t have a change in the law yet.

Bill: It’s not a problem. It’s not a problem seeking a solution.

Patti: Exactly.

Bill: A solution seeking a problem. The other way around. You’re right. For some higher net worth families, it certainly is prudent to have these conversations with their estate planning professional to look at, “There is a risk out there.”

Right now, when the 2017 law expires, we’ll have a change in the numbers. We could see a whole new administration before then, and we could see the numbers carry over, we could see the numbers change for the better, who knows what’s going to happen.

Patti, you hedge your bets a little bit. Maybe you’re not super aggressive with, for example, the spousal lifetime access trust strategy and gifting to the maximum at this point. Maybe you’re gifting below that, you’re hedging your bets a little bit. Every situation is going to be a little bit different.

Patti: Your point is well taken. Talk to your professional advisors, sit down with your estate planning attorney. Have a strategy in place that you can pull the trigger quickly if it’s something that needs to be executed, so you know what your options are and the pros and cons. That makes a lot of sense, but again, be careful about what some of the unintended consequences could be.

Bill: Then on individuals, Patti, this is more broad to a wider swath of investors out there. How can I hedge income tax risk? One of the best ways to do that is with Roth accounts, whether it’s funding Roth accounts or using Roth conversions.

I’m certainly not a fan of being super aggressive and going all-in on Roth and pre-paying like you said, pre-paying taxes today. I’m making a huge bet, but I’m in favor of gradually, over time, trying to build some diversification tax-wise.

I’ll use myself as an example, Patti. I’ve been with Putnam 30 years now, and one of the issues that I face is that I’ve been in the Putnam 401(k) for these 30 years and funding it primarily with pre-tax accounts, which has worked out favorably, but when I retire, I’m very much overweight pre-tax retirement.

Every dollar I take out, they’re going to be subject to ordinary income taxes. To what extent people can at least build a little bit of diversification using Roth accounts that gives them more flexibility in retirement to better manage their tax bill?

If they’re in a high tax bracket for whatever reason one year in retirement, maybe they need income, maybe they take some income out of the Roth, which is if they follow the right rules, it’s tax-free. It’s not exacerbating a bad tax problem further.

Patti: It’s not just the tax problem. It’s also the cost of Medicare Part B. You can get a hit with that IRMAA, the penalty tax, which you have to pay more. For IRMAA, it could bring more Social Security.

Most people are probably going to have 85 percent of the Social Security included in taxable income, and yet, there could be those years between retirement and age 72 where none of it is taxable, or 50 percent of it is included as income.

Again, there’s a domino effect in every decision. Just know what those effects are in your personal situation.

Bill: Correct, and don’t forget those HSAs, too, Health Savings Accounts. If you’re funding an HSA, try to avoid tapping into that if possible. If you’re able to let that grow and use that in retirement, it’s going in, it’s tax-favored on the way in, potentially could grow tax-favored, and it’s tax-free on the way out if it’s for qualified expenses.

Patti: It’s the only thing out there that is…This is truly the home run is the HSA, because it saves tax going in, you’re not paying taxes on it, it grows tax-deferred, and you’re not paying tax on any of the gain as long as you follow the rules. Home run right there. Great point.

Let’s pull this together. We know what’s there. Granted, the proposal is not as draconian as we originally thought. We’re a long way to knowing what that bill is really going to say. What do you think would be most likely, just out of curiosity?

Bill: We didn’t talk about corporate tax. We’re not going to really get into that. I think I could see a corporate tax rate increase from 21 percent to 25 percent, not as proposed 28 percent.

That’s going to provide them with some revenue there to offset at least some of what they want to do on the spending side, whether it’d be infrastructure or healthcare, childcare, education support, those types of items.

On the individual side, for me, the most likely movement would be the current 37 percent tax bracket where that falls, and that said about 523,000 for individuals and above 628,000 for couples. I think that goes back to 39.6 percent. I do think they have enough votes within the Democratic caucus in the Senate to do that.

Those are the two most likely items. I wouldn’t be surprised if we saw that long-term capital gains rate and qualified dividend rate in shop a little bit from 23.8 percent, maybe to 25 or 28 percent. I just don’t think they have enough votes to get to 43.4 percent for some people.

Then less likely, call me a skeptic, I’m still a little bit skeptical on changes to step up and cost basis. A lot of moving parts, a lot of complexity are very difficult to enforce that provision. I could be way off there, Patti. I’ve been wrong before, and I’ll be wrong again. But as we stand right now, it’s an important policy objective. Just the complexity of it makes me a bit of a skeptic.

Patti: Bill, I can speak for myself and probably everybody listening to this podcast today or watching it. I hope you’re not wrong.

Let’s do this. How about you and I do this? We’ve heard it here first. It is, by the way, Tax Day, May 17th, kind of lock and load. This is the day that Bill Cass said A, B, and C. Bill, would you like to come back? Would you come back, maybe in the fall when we have a little bit more clarity? Let’s circle back and say, “OK, this is what we thought. This is actually what’s going through.”

We can summarize what our listeners and people watching need to do at that point. We’re going to have enough time, I think, before the end of the year, right?

Bill: I think so. Frankly, I think it’d be a fun exercise to say, “OK, this is what we’re talking about back in tax day.” Let’s say maybe it’s October, maybe November, even early December, whenever we have more clarity. It’d be fun to see this was really a big surprise. We thought it would play out that way.

Once we have more clarity, there’ll be more clarity around the individual financial planning items. That’s the most important thing.

Patti: Bill Cass, it’s a date. Thank you so much.

Bill: I’m looking forward to it.

Patti: Me, too. Thank you so much for being here today. Thanks to all of you for listening. I hope this was helpful, clarifying a lot of things for you and for us in terms of what’s actually in the proposal and what we need to do about it. Thank you for joining us today.

If you have any questions, you need some clarifications, go onto our website at keyfinancialinc.com. Let us know what you think. Feel free to contact us. We’d love to hear from you. In the meantime, I hope you have a wonderful day. I hope, by the way, you’ve already filed your taxes. Thanks again. Take care. Bye-bye.

Ep72: What Advice Do You Have for College Grads Just Starting Out? 3 Top Strategies to Get Started Off Right!

About This Episode

This episode is next in the new podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (Rarely asked, but should be asked, question). As graduation season is upon us, this timely episode offers three specific things to do for recent college grads. These tips from the Barron’s Hall of Fame Advisor and Forbes Best in State Advisor are the same advice that Patti gave her own kids when starting their careers. Listen today and share these valuable strategies with all the college graduates you know!


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, we’re going to talk about our adult children because if there’s one question I get over and over again, it is the following. Patti, my son just graduated from college. He got his first job. What should we tell him about what to do? 

That’s a really important question. It’s one that has actually motivated us to set up a wonderful internship program for college students because I find that this stuff is not taught in high schools or colleges. I think it’s a shame because we go into this world assuming that, “Gee, somebody’s got a college education. They already know about all this stuff.”

Whether it’d be about taxes, how to manage a budget, or what a mutual fund is, most kids are not getting that information in college. In fact, this summer internship program is called the missing semester. Today, I’m just going to spend a couple of minutes on three big items. 

Number one. A lot of times, kids are going to leave out home. I probably would encourage that if it works in terms of where their job is, and it’ll give them the opportunity to save some money. As they do that, I think it’s really important that they act as if they are paying rent because eventually, they will be. Let’s get them started right away on the right foot. 

Number two. When it comes to saving money, I would 100 percent say automate your savings but pay your bills the old-fashioned way. Sounds odd, right? Automate your savings, what does that mean? 

Well, number one, if they have access to a 401(k), they’ve got to do at least 10 percent, especially if they are single, before they get married, buy a house, etc. This is a time when they can really sock it away. I got to tell you that compounded growth over a 30 year, 40 year period is huge. Automate the savings. Try to do as much into the 401(k). 

In addition to that, I emphasize also set up an automatic savings that is not a retirement account. Kids can start with $25 a month in a mutual fund. It just gets them in the habit of having that money withdrawn from their bank account, and they get to see it grow over time. Again, we’re developing habits. We’re nudging them.

As it relates to paying the bills, our kids are so tech-oriented. They’re going to do everything online, do everything on their phone. That’s fine, but I often find that there’s an awareness that is often missed. If you think about Venmo, Venmo is a big deal. You have no idea when your Venmo when your friends what it was for. We lose track of where our money is going.

You’ve heard me say it before, instead of wondering where your money went, tell it where you want it to go. That starts right when the kids graduate from college. If they can get that in their mindset, they will accumulate wealth over their lifetime, so paying the bills the old-fashioned way.

Hey, nothing wrong with writing a check. If you write a check, you’re going to know what you’re spending. It’s going to register. You’re going to teach your kids. If you’re graduating college and you’re listening to this, you’re going to learn. Ask the question, “Do, I really want to be spending my money this way? It’s one thing when it was mom and dad’s. Quite another one, it’s mine.” Very important. 

Last but not least, build your credit. Here’s the deal. That is very, very important. Build your credit. Now that can be done by getting a credit card. But by all means, you charge the gas and you pay it off right away. That’s how you increase your FICO score. 

That is really going to come in handy when you go to get a car and certainly when you go to buy a home. You need a FICO score that is in the mid to high 700s to get a decent interest rate. 

Those are some quick tips. There are so many more things that we can talk about as it relates to educating our children. Feel free to give us a call any time. Believe me, I’ve got four kids. We’ve had to go through this education four separate times. Sometimes, they get it quickly. Sometimes, they don’t. Believe me, I totally understand. 

Thank you so much for joining us today, and I hope you have a great day. Take care.

Ep71: Leadership through COVID Crisis with Chester County Penn Medicine Hospital CEO, Michael Duncan

About This Episode

Newly recognized by Chester County Chamber of Business and Industry as the 2021 Executive of the Year, Michael Duncan shares his experience as Chester County Penn Medicine Hospital’s CEO during the COVID pandemic. Patti and Michael discuss the multitude of challenges that he faced during the worst global pandemic in our lifetime. From PPE shortages to fragile employee morale to issues of social injustice, his leadership was tested at every turn. Who inspired this CEO through the worst of it? What were the lessons learned and taught? Patti asks the tough questions and learns a lot of what was happening behind the scenes during this tumultuous year. In part two of a two-part series, this episode is one of heartache but also one of hope and the fortitude of the human spirit.


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, we’re going to bring Michael Duncan, president, and CEO of Chester County Hospital back with us by popular demand. Michael is an amazing speaker. He’s so interesting. He’s so insightful and wise. Today, we’re going to be talking about crisis management. How in the world does the CEO of a hospital navigate something like a pandemic? Michael, welcome to the show.

Michael Duncan: Thanks, Patti. Happy to be here.

Patti: Before we go into this bad stuff, the crisis, etc., why don’t you share with us, tell me a little bit about what brought you to Chester County? Tell me about you. Tell me about Carol, kids, etc.

Michael: I’m from Fort Worth, Texas. I grew up in a tough neighborhood. Every third or fourth house was abandoned. My folks were poor. In eighth grade, they sat me down, wanting to make sure I knew they were poor and told me, “The day you graduate from high school, you’re on your own, and so you need to study hard.”

The great advice I gave is, you might want to see if you can get in the Naval Academy. They thought they’d probably pay my bills, or I’d have a job, or something. I applied to one school, the Naval Academy. I wouldn’t recommend that. I got in and pursued a degree in engineering physics.

In my second year there, I had a much more social buddy who said, “I got an idea. Let’s put a blind date together for the Army-Navy Game.” I went reluctantly. He arranged to have three girls from a place I’d never heard of, Westchester, Pennsylvania, meet us in the End Zone of the old JFK Stadium. We watched the game.

Afterwards, we went to dinner in South Philly somewhere. My date was on my right. My future wife was on my left.

Patti: Oh, my goodness.

Michael: Fortunately for me, my wife’s date…That’s a funny statement isn’t it? My wife’s date. Her date was a plebe, a first-year guy. I was a second-year guy, so rank has its privileges. During a break and dinner, I pulled him aside and told him that he’d need to get on the bus and go back to Annapolis that I was going to take care of his date.

I’m sure I did something gentlemanly with my actual date. I just don’t remember what it was right. Carol and I, it was love at first sight. Since then, we’ve been in 10 states, 17 homes, and a lot of that in the military, a lot of it in my business career. When we had the opportunity to come back to Westchester, Pennsylvania, in Carol’s hometown, I couldn’t pass that up.

Patti: Wow, what a story. What a wonderful story. I just have to ask, how did you go from aeronautic physics to running a hospital? How did that happen?

Michael: The book I recommend to everybody who’s working on their career is “What Color Is Your Parachute?” I went through the exercises when I was getting out of the Navy. The exercises told me the five most important things to me.

I want to motivate, influence, and persuade people. I want to solve complex problems, and I want to do something important for my community. I knew that that wasn’t nuclear engineering.

Patti: Really?

Michael: I ended up through a relationship at church getting a chance to be a salesman for a new thing called HMOs. The sales guys needed math skills because you did the actuarial work to create what kind of premium do you need. You’re talking to CEOs and CFOs and trying to get them to move from traditional insurance to this new thing called managed care.

I did that for several HMOs. A university hired me to start a Medicaid HMO from scratch and as a side job be the CEO of their 400 physicians. I fell in love with working with docs, running their practices, and understanding how medicine really works. At the time that they were in a bad way financially, I helped get them turned around. I got a reputation for a turnaround guy.

I went from there, to Temple, help the physician group there, get turned around, always going to be tough to make financially successful organization on North Broad Street but wonderful people. Then I went to Columbia University, who were having financial troubles with their 1,500 physician group and just use the same tools I’d used before and then had the opportunity to come here.

The thing about engineering that fits running a hospital is there’s a business writer in the ‘90s who was asked, “What’s the most complex business in America?” He said instantly, “Running a hospital.” It is so complex, the clinical stuff, the business stuff, the culture stuff. That’s what I love. I love the complexity of it.

What am I doing today? Motivating, influencing, and persuading people, solving complex problems, and doing something important for my community.

Patti: Wow, wow, wow. You know Mike, I’ve known you for 10-plus years. I never heard that full story. That’s really amazing. It says a lot about…Now I understand. Let me just put it that way. Now I get it. I really get it. Seeing the outcome of your actions in terms of even a day-to-day basis, I am well aware that you walk the halls every single morning.

You know all of the employees by their first names. You go in, see patients, and check in to make sure they’re doing OK. You’re doing all of those things, plus some. How do you navigate this? Now, let’s go back to the last year.

The last year, we’ve experienced profound issues, crises, from a healthcare perspective, a social perspective, even with Chester County Hospital’s expansion. Let’s talk in hindsight. I can’t imagine what you must have been thinking while you weren’t going to throw it. How did you do it? How would you manage it all?

Michael: It would have been more straightforward if COVID hadn’t come along.

Patti: That’s true.

Michael: We were faced with moving into 50 percent expansion in our space, moving all of our operating rooms and procedure rooms, all that’s complicated enough, starting new services. We have a hybrid room. Now we’re doing structural heart disease where we replace valves without even opening the chest. It’s just amazing stuff that’s going on.

That’s largely was a logistics and even clinical logistics exercise. We had that well in hand. Shortly after we had our opening party, COVID hit. We couldn’t move into the new facility because the state stops sending inspectors out. We were given emergency permission to use it, if we had a COVID reason to use it. Like everybody else, we were figuring out COVID as we went along.

One of the great things about being part of Penn medicine is it’s a learning organization. We would be on the phone every evening at five o’clock. What are you learning? What’s the best guidelines? We had direct connections with the CDC? What’s CDC finding out about this? Whatever their guidance was, we were executing on their guidance.

One of the major focuses for us was, how do we keep our employees safe? What we learned early in a pandemic is, if COVID spread among our employees, we can’t take care of the community. The number one priority became keep our employees’ safe, and then we know they’ll take great care of the patients. That, again, was mostly logistics, clinical early.

Once you knew what you needed to do clinically, it was how do you get a mask, goggles, and whatever on every patient. We actually would have been in big trouble if the community hadn’t stepped in. We had over 200,000 pieces of PPE given to us, which we used every day until the logistics and the supply chain caught up. It was a real community effort.

Patti: That’s just so amazing. It doesn’t surprise me at all in a way. When you think about it, you and I both know that the Chester County’s experience with COVID and the outcomes have been much better than many other hospitals. How much do you think the community had to do with that?

It sounds like everybody’s stepping up as much as they can, dropping things off at the hospital which, by the way, probably was another logistical nightmare. How do you do that and keep those wonderful people who are dropping this stuff off? How do you keep them safe? I can’t help but wonder how much of an influence that has had on the outcome and the success that we experienced here in Chester County.

Michael: It was really wonderful. We had everybody from dentist’s office who were closed. They brought their PPE over to auto body places but PPE over. I wouldn’t have thought of that, but they’re using the same thing to protect themselves.

We had hundreds of mostly women and some guys who sewed masks because there was a supply chain issue on masks. It was a logistics exercise on the receiving end how do you get all this stuff. We needed all our employees taking care of patients.

Our foundation staff who routinely spend their time raising money and connecting with donors, they manned the sites where the PPE came in and fed a lot of people step into roles that aren’t their job, but we need it. There’s a willingness among our team to do whatever it takes.

Patti: Wow. That is so interesting. It’s just, “OK, you got to pivot. Everybody, just step up, help wherever you can, and we’re going to get out of this thing.” Like in terms of the staffing levels, etc., did you ever find yourself having to go outside to bring in people from other states, nurses, caregivers, things of that nature? Did it get to that point at any time?

Michael: We tried to do that, but pretty quickly, the supply dried up. The market rate became $170 an hour. Even if you were willing to pay that, you couldn’t get anybody. The most important thing, again, was keep our team safe. They’re not out on quarantine. The first two and a half months, I was in the hospital seven days a week.

All I did was go unit to unit, and I ask them, “Do you have what you need to keep you safe?” Sometimes, we had logistics issues within the hospital. They would tell me, “We don’t have this. We don’t have that.” I’d connect with the guys in the warehouse, get some boxes of this up here, and I did that for two reasons.

One was keep people safe, and the other was, people were scared. They didn’t know what this thing was. They were more scared for their family than they were for themselves. I routinely found nurses and docs in tears. I just wanted to give him the emotional support that, “Look, you’re not in this thing alone. We’re going to do anything you can think of to keep you safe.”

Patti: What a message too, boy. I would imagine that on the other side of this, you’re going to have a staff that is so – I know we already do – intensely loyal because you care about them as people. You care about their families. That’s so important.

That’s who you want to work with. That’s who you want to work for. You are much more important to us than the work that you do. That’s a powerful message for anyone to hear and to be acknowledged, recognized, and be told, “It’s OK to feel like that. It’s hard. These are scary times. We’ll be with you side by side and give you everything we possibly can to get you through it.”

Michael: In the last episode I mentioned my management philosophy is love people, expect excellence. We wanted them to be clinically excellent, but we really needed to demonstrate our love for them as an individual and our love for their family. That had to show up in terms of keeping them safe and give them the staffing they needed to do the job.

Patti: Were there any major changes that you had to make? Again, you pivoted. You did things, the changes that you had to make at the time. What do you think is going to be permanent? Is there anything that you think is going to be a positive outcome that, “Gee, we probably wouldn’t have done this if we hadn’t had to, but now that we did it, it’s kind of working out pretty well”?

Michael: We had a plan to move into the facility and what we’re going to move out of the older part of the hospital into the newer part. We had to change that plan sometimes on a weekly basis, and we haven’t fully executed on it because we’ve had to respond to what are the clinical needs for COVID patients and keeping everybody safe.

One of the things we hate and the community doesn’t like either is restrictions on visitor policies. Like everybody else, I have had to do that to make sure COVID isn’t brought in by a visitor. We tried to meet a need by using…

We stood up basically an army of iPad workers who would go to the bedside and let the patient communicate with their family using that technology. I’m sure that we will keep that for family members who are not local, but we’re getting back to the point where visitors are allowed in again.

The other thing that all of us have learned is you don’t have to be in the same room to have a meeting with each other. For me, it’s been fantastic. I haven’t gone into Philadelphia to our corporate offices since February. I don’t expect to change that after COVID.

Patti: There you go. What is that added in terms of your time, in terms of productivity, going back and forth and schlepping back?

Michael: Getting down there and back is probably a four-hour proposition when you get down to it. I’ve got 8 to 12 hours a day or a week more. I can use that being where I like to be out on the floors, finding out how we’re doing, getting suggestions for improvement. That part’s been cool.

Patti: That’s terrific. That is wonderful. If you think about the crisis management and think about what we experienced in the last year, we always focus on COVID, but we also had social justice issues. You had the practical issues of how to get this amazing facility up and running.

I don’t know if anybody realizes what we now have in this gem of a hospital in terms of access to the latest and greatest technology, cutting-edge tools and techniques. It’s one of those things where what I’m learning is that you build it, and they will come. What’s exciting is that we’re attracting some amazing healthcare providers.

They want to live in Chester County. They want to raise their families in Chester County. Look at this facility. Look at these ORs. We’ve got this robot. I just learned about not only the valve replacement procedure. There is another procedure for becoming really…We’ve got this terrific heart care that we’re able to provide because we now have all of that.

Let’s talk a little bit about what it was like leading through all of that – COVID, social justice, the facility, how to start using it. We were in lockdown, so you weren’t exactly getting the revenue that you were hoping to get? What was that like?

Michael: When you have multiple crises, you have to be intentional about letting your team know, “This is your lane, you stay in your lane.” There’s another group who will be in this lane. Another group will be in this lane.” When in normal times, my way of leading is we’re all in the room together talking about everything and informed about everything. We didn’t have time to do that.

Our CMO/CNO provided the medical leadership. Our chief operating officer and his team provided the logistical support. When it came to racial justice, social justice stuff, I just had to figure that out. It had to come from me. I just didn’t believe that you can hire a diversity officer and delegate it to them.

I started meeting with minority employees one at a time. I heard their stories. Their stories were heartbreaking to me, and their stories changed me. I decided we need to find a way for everybody in management. We have about 100 people at supervisor level on up. They needed to hear the stories.

We had a brave volunteer. One of our director-level folks who’s an African American woman told her story. In every one of those, we had White managers leave in tears. They just didn’t know this person who they’ve been a teammate with for so long had this experience. That’s gotten us excited.

One of the challenges for me as a leader, showing up every day on the floor seven days a week to make sure people have their PPE and know I’m with them and then listening to all these troubling stories about minorities’ experience life was really heavy emotionally.

I went back to my roots. I called my best friend from the Naval Academy, marine colonel who’s taught leadership all his life and I said, “O, there’s got to be a general who fought a war and was good at connecting with frontline troops but knew how to step back and take care of himself.”

He hooked me up with General William Slim, a British general in the Burma War, which was nasty and not well heralded. He’s considered the best general in British history by the British.

The troops called him Uncle Bill, because he would show up in his Jeep with one guy, not an entourage. He got up on the Jeep, and he would just talk to folks get their input, tell him what’s going on, cheer him on, and go into danger with them, not worried about his personal safety.

Every day at three o’clock, he returned to his tent, and he read a book because he just needed to pull out of it and have some time to recenter himself. I started doing that. I read it a different time of day, but I spent all my time reading about General Slim. I’d learned practical lessons for how to be…You talk about crisis management. He had a crisis.

Patti: That is so interesting. In nursing and certainly in what I do now, when crises hit, markets plummet. People are worried about their financial security, etc. You can get to the point of compassion fatigue, where like you, it’s 24/7. This is why we’re here. It’s to be here when it really matters.

You’re right. You have to have the presence of mind to step back and say, “If I can’t be there 100 percent, if the light in me is getting dimmer and dimmer, something’s got to change.” To be able to take that time and refresh, I think, is really critical.

Michael: That’s why when you get on an airplane, part of that script at the beginning that nobody listens to is, if you have a minor with you and the oxygen deploys, put your oxygen on first and then help your child because if you can’t breathe, you can’t help anybody else. As leaders, we need to…

There are a lot of workaholics among us. I’m one of them. We think, “I’ll just keep working harder.” Sometimes that’s a bad answer.

Patti: Very interesting. Mike, I have learned again so much from you today. I’m so grateful for your time and your wisdom and giving it to us real. This is hard stuff and to recognize that we are human beings also. It’s OK to be human because that’s what makes you great. It makes you so approachable.

I think that’s why everyone loves you so much because you’re not this guy high up on a hill. You’re walking the halls asking people, “How can I help you? What can I do to make your day better? How can I help you feel safer?” My goodness, who wouldn’t want to go out of their way to deliver excellence for somebody like that?

Thank you so much, Mike. I am so grateful for you coming today for your friendship and for leading our hospital for our community and making it one of the most incredible hospitals. Again, we said it before. It was just ranked number one by “Newsweek” the number one community hospital in Pennsylvania. That’s a big deal. It doesn’t happen by accident. It happened because you were our leader.

Michael: You’re very kind, Patty. Thank you. It’s been fun.

Patti: Thank you so much. Thanks to all of you for joining us today. If you have any questions, please feel free to go to our website, keyfinancialinc.com. We’d love to hear from you. Let us know what you’d like to hear about learn about.

I’m just so grateful for all of you. We’ve been getting emails and phone calls, how much you’ve appreciated these podcasts. Feel free to let us know what you want to hear about next.

In the meantime, I’m Patti Brennan. I hope you all have a terrific day. Take care now.

Ep70: Leadership through Change: Insights from Michael Duncan, CEO Chester County Penn Medicine Hospital

About This Episode

As a Board Member of Chester County Hospital for several years prior to Michael Duncan’s arrival, Patti was familiar with the financials of the Hospital. Within a year of Michael’s appointment to Hospital CEO, he was laying out a $300 million expansion proposal for the future of Chester County’s beloved independent hospital. Patti and Michael discuss the challenges his leadership faced, how he overcame them, and led them through the biggest expansion and future acquisition of the Hospital by Penn Medicine. Recognized by Chester County Chamber of Business and Industry as the 2021 Executive of the Year, learn how Michael’s leadership has now turned Chester County Penn Medicine Hospital into the #1 community-based hospital in Pennsylvania – according to Newsweek magazine. This is part one of a two-part series.


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’m really excited about our topic. We’re going to be talking about the evolution of healthcare delivery from the perspective of a hospital. We don’t always realize everything that goes into managing a large facility and people, especially over the last 10 years. We’ve had a lot of changes over the last 10 years.

Joining me today is none other than Michael Duncan. Michael is president and CEO of Chester County Hospital, a member of the Penn Medicine Hospitals.

Mike, thank you so much for joining us.

Mike Duncan: Patti, I’m glad to be here.

Patti: Boy, has it been a decade. First of all, I can’t believe that you’ve been there almost 10 years.

Mike: That’s right. It’s gone fast.

Patti: It sure has. Now, who would have thought 10 years ago? It was 2011. We had just come out of the financial crisis. Hospitals and medical facilities were reeling because Obamacare had been passed just a year earlier.

Nobody really understood exactly the implication of that, except that nobody’s going to be able to make any money anymore. Then changes in Medicare, yada yada yada, etc.

Now, during that period of time, not everybody saw the writing on the wall, and as a result, a lot of facilities are going through very difficult times right now, but you did.

Were there anything specific that you noticed that you really were paying attention to to recognize that this fiercely independent, community-based hospital might need to make some changes?

Mike: Well, my perspective having been, this is my fifth job as a CEO. All of my time in healthcare has been leading financial turnarounds.

Patti: Wow.

Mike: Chester County Hospital is a great hospital, great quality, great patient satisfaction, and low employee turnover, but we didn’t have any money, and we didn’t have margins. As you try to figure out how you’re going to get to a place where you can build everything you need to build for the community, we had to either get it through philanthropy, or we had to increase margins.

At the same time, we knew early on we needed somewhere in the neighborhood of $300 million of capital to get what the community needs.

Patti: It’s interesting because, for those of you who are listening, I want you all to know that I was on the board for three years before Mike came along. We were experiencing those squeaky thin margins, some years not so hot, etc., and then the transition, etc.

At one point – and I don’t remember when it was, Mike, but – we had a retreat. Mike laid out his vision for this hospital and was talking in numbers of $100, $200, $300 million. I’ve got to tell you, Mike, I was ready to fall off my chair.

Like, “Where in the world are we going to get $300 million?” It sounded amazing. It would be great to be able to deliver these services and have access to this technology, etc., but OK, how are we going to do it? How are we going to pull it off?

In that meeting, it was amazing for me to watch how you just laid it out so eloquently and came up with the solution. You identified the issue, came up with other things that we needed to consider, and then came up with a potential solution, and here we are today.

Basically, at that point, the logical conclusion was yes, we wanted to maintain our independence in terms of our culture, but to merge with a larger entity to give us access to that capital, to become the facility that, frankly, we are today was really the logical outcome. It was easier said than done, wasn’t it?

Mike: It was. One funny thing I didn’t tell anybody until long afterwards was I accepted the job in March of, it would have been, 2011. Two weeks later, our bonds were downgraded to junk bond status.

Patti: Wow.

Mike: Right before I started, and the plan was to build what is now the Lasko Tower. Nobody would loan us any money. I want to thank Fulton Bank for stepping in and giving us a loan. They got things started. They loaned us enough to build the structure, but not enough to build out all three floors of the hospital.

I had in my mind, “We’ll get to a point where the board sees we need a partner, but what we need to get a partner is we need to build a movie set. We’re going to build the outside of a beautiful structure, and we’re going to build one floor, so they can see what it looks. Then that’s where we’ll take them when they come see our plan in action.”

Then we did have that meeting. We had healthcare architects come in and say, “What do we need in 10 years?” You’ll probably recall, at that point, we were about 50 percent semiprivate rooms, and there’s no way you’re going to grow your patient base if you’re competing with hospitals that are private rooms, and ours are semiprivate.

That famous book, “7 Habits of Highly Effective People,” I have the book. I’ve never read it. Too many words.

I only remember one of the seven habits, but it is, “Begin with the end in mind.” That’s how I try to approach everything. Where would we like to end up? What’s our goal? There was no way we could stay the way we were.

We had to get the hospital converted to private rooms. Just going to take a lot of money. An additional challenge was the board had been committed to independence or die. It looked to me like death was imminent.

Patti: Oh, there is no question, Mike. Having sat in that room with many of my colleagues, you’re right. It was fiercely independent, only because we wanted to make sure that we could write our own rules, that we could deliver the services that we believed our neighbors needed, and not be having to answer to some god.

Mike: Yeah, and believe me, I think the best job in the world is an independent hospital president, because you’d make all the rules, and you don’t have a boss. I would have preferred to stay in that state, but we wouldn’t have done what the community needed.

Then it was just a process of going one layer of the onion at a time, laying out for the board, “Here’s our financial situation. Here are our financial projections if everything goes well, and if everything goes medium, and if everything goes poorly.”

Then showing them comparisons. “Here’s what our balance sheet looks like, compared to the hospitals in Pennsylvania.” We were in the bottom 10 percent, and that was surprising, I think, to all of us. The only way out seemed, we are in a wealthy community, so there was some consideration.

Do we have donors that would pony up big-time money? We would have needed more than $100 million to really move things forward. Then that was abandoned, so we started looked at what are merger options?

There are a lot of different models. We had investment bankers come in and present to us different models. Then, because of what the team had done over decades, we actually were very attractive to a lot of people.

We had 17 health systems approach us about joining them. That point you’ve made several times, our culture is our strategic advantage. We were looking for a partner who acknowledged that and was committed to that.

When we met with Penn Medicine, Ralph Muller in the first paragraph of his statement said, “You have a culture we would love to have, and we are committed to letting the local management team run the hospital and maintain that culture.” As far as I was concerned, the deal was done at that point.

Patti: It’s interesting, Mike, because as you may recall, I was one of the three people from the community who participated in that due diligence. It was a lot, and it was so interesting for me to be involved in that, and I so appreciated that opportunity.

I found it fascinating that every single one of those – what I call dog and pony shows – these people pulled out all the stops in terms of what they wanted to do and how they wanted to grow Chester County Hospital, etc.

You’re absolutely right. It was so clear that Penn was the right partner because that’s what they were looking at for. It was one of those things where they perceived us as being the diamond, a facility, and a group of individuals, healthcare people who they could learn from.

I really appreciated that, especially coming from the great Penn Medicine. They’re so well respected all over the country, and even all over the world. Here they are, coming in and saying, “We want to be more like you.”

That was very, very interesting to me. What I think is also very, I don’t know, it’s not a very technical word, but I think what is also so cool about this is that you’ve maintained it. Even with Penn, they’re in there, they’re supporting us.

We are still Chester County Hospital, neighbors helping neighbors. It’s still the same, and it’s so unique. Again, having – we were talking offline about this – I’ve had the privilege of working in a city hospital in Washington, DC as a nurse.

Worked in ICU outside the city here in Philadelphia. I even worked in England, learning about socialized medicine, learning midwifery. I think I’ve been exposed to a lot of different cultures, and I’ve got to tell you, there’s just nothing like Chester County Hospital.

That comes through in the quality of the care and the attention. Are we perfect? No. I think what I love and I admire so much about you is you’re so transparent. It’s always, “We’re good, getting better.” We’re always looking at ways to improve.

You’re very open. You want to understand what’s happening for patients and for people in the community, and looking at ways in terms of how you can fix it. I guess I didn’t realize that you were the CEO of five, this has been your fifth stint.

Now, it all makes sense. It all makes sense. You’ve turned this thing around. Really, Newsweek just came out and said that we were the number one community-based hospital in Pennsylvania. That’s a big deal and something that we can all feel proud of.

Here’s a question. Again, I admire your transparency, so give us the dirt. What were some of the challenges? What were some of the things that were maybe even more difficult than you anticipated or took longer, etc.? What do you think? Is there anything that stands out?

Mike: First, I want to give a positive for why the culture stayed the same. If I could, I just want to talk about culture management a sec.

Patti: Please do, yeah.

Mike: One of the most remarkable things, particularly for me as a turnaround CEO, everybody on my management team except the CFO, 10 years in, was hired by my predecessor. It was good, mature, steady management, and I have kept that team together because they produce these kinds of results.

They just needed resources. They needed what Penn Medicine could provide that we couldn’t provide for ourselves.

The time that was challenging was to see what we need to do and know that we’re going to have a fair number of board members who were just going to have a hard time with that, and figuring out how to go step by step and get there.

There were threats along the way that could have just taken us down that I was trying to manage out of the limelight. If a big group of our doctors moved to a competitor, we’d just go under. We had no financial resilience.

The culture pieces and there was a study done in the ‘90s that compared companies with a great strategy with other companies with a great strategy, but the other company had strong culture. The CEOs that are intentional about culture management, their companies outperform other companies in the industry.

What I did in the first six weeks was ask members of my new management team, I said, “You guys know the culture. I don’t. I want you to sit down and write out our values because I’m not sure what they are.” My only contribution was I said, “You can have five words.”

Patti: Wow.

Mike: Back they came with five words. It was innovation, collaboration, accountability, respect, and excellence. Then I said, “All right, we’re going to teach all these to all of our employees. I’m going to teach them to all new employees on their first day of work.”

I did that this morning, new employee orientation. All I talk about is our culture. “Here’s how we’re going to treat each other,” and most people can do that. If we discover you can’t, then we’re not going to be right for you, and we’ll let you know.

We talk about the I Care values in management meetings and group huddles. It’s on our website. We celebrate people who are caught in the act of their I Care values, and I think that’s what been able to…We’re very intentional about managing culture over time.

A threat to that was when we increased the footprint by 50 percent and moved into the new tower. That can be a culture changer. I just beat the drum that, if we move into this beautiful new facility, and we leave our culture behind, we will have wasted $300 million.

We’ve got to be I Care focused when we get into the new facility.

Patti: Wow, that is such a story. It’s so interesting in terms of, you think it’s all about the dollars and cents. You think it’s about the strategy. It’s the competitive advantage, etc. No, at the end of the day, as with most organizations, it comes down to our people.

Are people delivering the ideal of what can be done? That is so interesting.

We’ve been through a lot in 10 years, tons. Who would have seen not only changes in Medicare and insurance, and etc., we have a brand new disease that we’re fighting, and we’re fighting it incredibly well, I will add.

We’ll put that aside for the next time we’re together. Here’s a question for you. What do you see for the next 10 years? I know that you had the goal. For the most part, we’ve hit it, so what do you see for the next 10 years?

Mike: I’ve been thinking about that a lot, because I’d never stayed with one organization for 10 years. I did the turnaround, and then I’d go to another turnaround. This is different because this is my wife’s hometown.

I have the privilege of leading the hospital in the community we’re going to retire in. It surprised me some that we got to the finish line. I had a 10-year plan. That sounds like something you’ll never achieve, and then we got there.

The kinds of things I have been thinking about are I want to be more involved in the community. We are one of the big organizations in the community, and so I want to strengthen ties with elected officials, with church leaders, with West Chester University and see what we can all do together to make the community better.

Use the voice that is afforded to somebody who’s a hospital president to make not just the hospital but the community better. An area of particular interest this past year with the social justice stuff, I saw…Well, I’m just going to stick in here my management philosophy is, “Love people, expect excellence.”

You’ve got to do both at the same time. Take great care of the people and drive for excellence every day. Don’t let being soft on people be an excuse for lower standards, and yet don’t pursue excellence and leave bodies behind.

With that sort of framework, when everything was going down last summer, I saw our minority employees, and I could tell they were burdened. They didn’t look like they usually looked. I just started meeting with them one at a time and just asking them their story.

“What’s this look like to you? How are you feeling? What’s going on with your family? Can you tell me your view of the world?” I heard story after story that, I thought we had come further. Yeah, we’ve made progress, but the day-to-day experience of some of my folks was a parallel experience from mine.

It was weighing them down. I’ve gotten very involved in talking to some of the Black church leaders, the president of the NAACP. I never thought I would talk to somebody from the NAACP. Kyle and I are now buddies.

We’re trying to find ways that we can work with the whole community, and I think we can play a role in diversity and inclusion. For me, it’s not a political statement. This is about love your neighbor as yourself. If I say I’m going to love people, I need to love all the people.

Trying to figure out what to do with that in the next 10 years, and then I’ve got work on succession planning. Everybody on my team is in the same age band. Perry handed me a wonderful culture and a great management team, and I owe it to my successor, and it’ll be a different management team.

God willing, I’ll last at least 10 years, but almost everybody on the team is likely to turn over. How do I fill in with new leaders, some from within, some from outside, that have that same vision? Those are the big, softer things that are occupying me, not the hard thing of find $300 million and build a building.

Patti: Right, wow. Sometimes, I would think that the softer things are often even harder.

Mike: It is harder. You can’t put it on a spreadsheet and make a plan.

Patti: No, absolutely. Yet, just from my perspective – I’ll end with this story – just to share with everybody how, when Mike Duncan says something, it’s amazing how quickly it can happen. This story is about a walk that I was having with one of my best friends this weekend.

It was just one of those random conversations. “How you doing? What are you up to?” What have you. This person was a fervent believer in a different hospital system – I won’t even mention it – and has over time, she’s begun to volunteer for the hospital, for Chester County Hospital and loves it.

She told me that she is 1 of 100 volunteers who since January have been proactively been reaching out to the community, making phone calls, just to check-in and see how they’re doing. It’s interesting. Number one, I learned two things from that conversation.

Number one, I learned how just amazing our volunteers are. The fact that they’re giving up eight hours a day, the amount of time these people are spending on the phone, reaching out to random strangers, but their neighbors, that was amazing to me.

It really said a lot about, again, the culture, the hospital, and how we really want to be there for people in the community who may be vulnerable, may live alone, or just might appreciate a phone call. The second thing that I learned is that not money people answer their phone anymore. [laughs]

They leave messages, etc., but it just is…Even for someone to just put on their answer machine and hear someone saying, “Hey, I’m calling. I’m a volunteer with the hospital, just checking in to see how you’re doing. Is there anything that we can do for you? Do you have any questions?”

I think that says a lot. I don’t know of many hospitals that are actually doing that. Again, there’s that spirit of, “Let’s all come together and make our community stronger, better, and feel even more included.”

Mike, I don’t know how to thank you enough. It’s been an amazing 10 years. I’ve learned so much from you. I’m so grateful for our friendship, and I’m grateful for you being with us today.

Mike: Thanks, Patti.

Patti: All right. Thanks to all of you. What a privilege it is to have you here with us on this podcast. Join us again. Mike’s going to come back. We’re going to talk a little bit more about some of the challenges that we faced with the hospital, COVID, and anything else that might come to mind.

Thank you so much for joining us, and we’ll see you soon. Take care.

Ep69: What Documents Should I Keep on File?

About This Episode

In the first episode of the new #AskPattiBrennan podcast series, Patti answers one of her listener’s frequently asked questions. This series of podcasts will be shorter in length and will address one FAQ or RAQ (rarely asked, but should be asked, question). In today’s episode, Patti cuts through all the confusion regarding how long certain documents should be kept and when is a good time to shred them. There are three timeframes to keep in mind and each one is specific to certain documents. Listen today to get your answers!


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. We’re going to continue with this “Ask Patti Brennan” series.

Let me tell you, if there’s one question I get over and over again is, “How long should I keep my tax returns? What documents should I keep on file?” As boring as it might seem, I’m going to try and make it not so boring. We’re going to cover those things because they are important.

First, when it comes to taxes, how long should you keep your tax returns? Here’s the deal. There are three timeframes I want you to remember – three years, seven years, and forever.

Three years, keep your tax returns for three years. Depending on the state that you live in, you may need to keep them a little bit longer, but three years should do it. If you ever showed a loss for a security, a business, or what have you, you should probably keep all of those records for seven years.

Finally, if you ever filed a gift tax return which is Form 709 you got to keep that forever because that’s not going to be questioned – no offense – until you die. That’s when an estate gets audited, and when it gets audited, the gift tax returns are brought back in to do the calculations. By keeping the 709, your executor can prove in fact that you filed in a timely manner.

What else? What about your healthcare documents? Obviously, if you write off medical expenses, that’s probably in that same three-year category. If you’re on Medicare, every year you get this statement. That is a Medicare summary notice. Keep that for a year. After that, you’re probably good. You can throw those away.

If you are receiving employer-paid coverage or if you’ve retired and you’re Medicare eligible, but you decided to stay on your group medical insurance, you’re going to need to keep the notice. You’ll get a notice every year of creditable coverage.

Guys, that’s important to hold on to because there may be a time when you need to get the supplemental, especially Part D, and you have to have that creditable coverage to avoid the penalties. The penalties are not pretty, so hold on to those forms.

How about legal documents? The basic things, for example, your marriage certificate got to keep the original, right? We’ve got this new driver’s license rule called REAL ID. You need your original Social Security card. We have to have that taken care of by October of this year. To get your REAL ID, you need your original Social Security cards.

Legal documents, obviously, you want to keep them forever. Here is the key when it comes to your wills, your trust, and your powers of attorney. Who’s got the originals? That’s important because you have to have the originals when you’re settling an estate. Originals meaning original signature.

We have a client who had a trust. It was a trust that she established in her lifetime. Her attorney was holding on to it. Guess what, the attorney died. His records, gone. She does not have the original trust document.

It is a major pain in the neck in the state where she lives to fix that issue but far better for her to fix it while she’s still alive waiting until she passes. It’s a nightmare. You don’t want to have to have that happen. I would say also when it relates to this stuff, worst comes to worst, scan the stuff.

For us, we have a wealth management system that includes a digital portal and a vault. It’s a digital vault. You can scan all that stuff into the digital vault. It’s fully encrypted. At least, you have copies of this stuff – copies of the insurance policies, pictures of the house, and the contents of your house – in a digital vault.

That way if you have an insurance claim, you can prove that in fact you did have that jewelry or that furniture.

In terms of investments, very important. If you made investments before 2012, it is important for you to keep the records of how much you originally paid for that investment because that was before a new law was passed. Not so new anymore, but it was a new law at the time. You are responsible to keep track of your cost basis.

Cost basis is really key because if you’re not keeping track of it, chances are you’re overpaying when you sell them.

In terms of retirement accounts, especially with COVID, if you got a COVID-related distribution, you want to keep that 1099 R and keep that record because you’re not having to pay the 10 percent penalty on it. Same thing with Roth conversions and also key as it relates to the taxes.

If you ever did nondeductible IRA contributions, I hope – put it this way – that you file Form 8606. That’s a form that acknowledges that you’re not taking a tax deduction for the contribution, but the earnings are growing tax-deferred.

Sidebar, guys. You never want to co-mingle an after-tax IRA with your other retirement accounts because the majority of that money, you’ve already paid taxes on that. You don’t want to pay taxes twice on the same money. The Form 8606 proves it, so keep those. Scan them. Keep them.

As it relates to property, cars, things of that nature, your deeds, your titles, all that kind of stuff, just scan that stuff into your digital vault so that you can retain copies of it and retain that proof. Same thing with the insurance policies, just scan that stuff. At least it allows somebody.

If God forbid that you’re sick, you’re unable to act on your own behalf, it allows somebody else who was acting for you. It gives them a trigger and say, “Gee, does mom still have this policy?”

It’s a phone call to the insurance company. But if you don’t have a record of it, if you don’t have it scanned, nobody’s going to even know it exists. Really, really important. Think about your home and the contents of your home and also think about the improvements that you’ve made to the house.

Under current law, each of us gets a $250,000 exclusion on the gain of our home. While real estate going bonkers, especially right now, chances are the gain on your home make see that. You want to retain proof of the improvements because that gets added to your original cost. By doing that, you’ve got proof and you’re reducing your tax liability if you ever decide to sell it, downsize, etc.

If you have property in different states, especially in the year of transition, states are getting aggressive, especially people who were wanting to move down to states like Florida where there is no income tax and there is no inheritance tax.

States like Pennsylvania, New York, New Jersey are like, “Hey, wait a minute. Are you really living down there, or is this a second home?” Very important, keep records. You’ve got to stay there 51 percent in order to clean that and avoid all those taxes.

You got to think like an auditor, think like somebody who is trying to get something from your income or from your estate. By doing so, you’re protecting the money and what you’ve worked so hard for.

Speaking of keeping things on file, how about your digital assets? What do I mean by digital assets? Think about all your pictures on Google Photos or on Facebook. Those are assets, and they’re password protected. How is anybody going to even know that they exist? This is your life. This is your history. You want somebody to be able to get into those.

Believe me, the stories that we’ve heard about family members trying to get into Facebook accounts, forget about it. What you want to do with those is assign something called a legacy contact. Go into Facebook, put it on your private profile, name a person, and then they’re allowed to get all of what you’ve posted and all of your pictures from Facebook.

Same thing goes with Google. On Google Photos, you just go, and in that it’s called an Inactive Account Manager. Again, name that person, they’re in. Everything that you have on those sites is protected and somebody can access it, and your legacy and your memories live on forever. I think it’s so important.

We also think about passwords. Let’s take an example. Let’s suppose somebody has a stroke along with the physical issues that that person might have. Short-term memory could be lost. If there are passwords, for example, there is a password to even get into a computer. Everything’s in the computer. Where is that password stored?

There are password programs and things of that nature. One, for example, would be LastPass or Dashlane. They’re wonderful because you don’t have to remember all the different passwords, but somebody needs to know the password for that. Keep that in mind.

I even think about our phones. Our phones have passwords, and now we have facial recognition. I think about my mom, when my mom died – true story – we all took a lock from her hair as a memory for her. Now these phones have this facial recognition.

I don’t know if it’s possible, but could you to take a phone and put it up to a dead person and have it unlock the phone? Wouldn’t that be wild? No, we are not going to try it, guys, but it is an idea. Remember, everything’s on our phones. We got to figure that out.

Finger prints. I guess you could probably think of fingerprint. I know this is morbid and I don’t mean to make light of it. The fact that better is we live on our phones and everything is there. Digital assets, phones, Google, Facebook, etc.

Last thing as it relates to the Internet and all of that, it seems like a long time ago. 2015 is a long time ago, but that was the year of the Experian breach. We all forget about that, but 24 million Americans have their Social Security numbers now on the dark web.

Let me tell you something, guys. The cybercriminals know that we’ve all let our hair down. We all forget that that happened, but those Social Security numbers are still there.

Be really careful and think about the credit monitoring services that are out there. I got to tell you, people can take your Social Security number, look at your Facebook, figure out your kids’ names and all of that to get in there, and then start applying for mortgages and credit cards.

I will tell you when that happened, first thing that I did was sign up for LifeLock. We have a million dollars’ worth of insurance that in the event that our identity is stolen that we’re covered. It’s a real pain in the neck, guys. But boy, it’s worth every penny. Be careful.

Same thing with emails. We get email hacks every other week. Understand that that’s out there and protect yourselves. Those are a couple of the ideas, again, not all-encompassing. Hopefully, that’ll help you come up with a checklist of things. By the way, speaking of which, don’t forget the old-fashioned stuff.

The reason that we get calls is because somebody put my name on their refrigerator. Old fashioned list of contact people still work today.

That will wrap it up in terms of some of the things that you might want to keep on file, whether it’d be at home or in a filing cabinet. In the meantime, thank you so much for tuning in. I hope this was helpful. Take care, and have a great day.

Ep68: The Fiscal Stimulus and The Output Gap – A Messy Art Form

About This Episode

Patti meets with her Chief Planning Officer, Eric Fuhrman, to discuss the recent fiscal stimulus packages and the effect they have on the nation’s output gap. To understand the relationship between the two, they first define the concepts and then give historical perspective. Many Americans are asking the question, “Why does the government spend huge sums of money during economic crises?” Patti and Eric answer this question and delve into the nuances of how the government determines exactly how much to spend. They also explain why this practice has been so effective for our economy – contrary to some public reaction that may be heightened when discussing figures of this magnitude.


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, we’re going to be talking about a really fun, entertaining concept. It’s called the fiscal stimulus!

We’re going to be talking about it with none other than the professor, Eric Fuhrman, Chief Planning Officer here at Key Financial. We’re going to be doing something different this week. We’re going to let all of you see how this sausage is actually made. Because we’re talking about something like the fiscal stimulus, it’s a messy art form, right?

We’ve prepared, and always prepare, lots of charts and graphs and things of that nature. When you’re talking about something like this, sometimes it’s just easier for you to look at the picture for you to be able to see what in the world we’re talking about.

Welcome to the show, and Eric, most of all, welcome to the show for you as well.

Eric Fuhrman: Thanks so much, Patti. Great to be back as always. I love being in podcast studio with you talking about all these different concepts. I was thinking, we should come up with a name for you.

I’ve been given this term of “the professor” which is great. I’ve been called a lot of things in my life, that’s a more flattering term. Maybe we should think about coming up with one for you.

Patti: Good luck with that one. That’s all I could say.

Eric: All I would say is we won’t do it here because then you have to tune into next week’s show to figure out what we’re going to come up with.

Patti: There you go. That’s a deal. That is a deal.

All right. We’re talking about the fiscal stimulus and this art form. What we thought would be helpful is for us to attack these three ways.

Number one, we’re going to go back in history and give you a historical perspective of what got us to where we are today. Then, we’re going to be talking about this thing in terms of this output gap which is what theoretically the policymakers are targeting, and why deficit spending tends to work over time. At least we hope it does, right?

Then, we’re going to be talking about where in the world do they come up with the number. $1.9 trillion. It’s not $2 trillion, it’s not $1 trillion. It’s $1.9. Where in the world do they come up with that number? Eric, thank you so much. Welcome to the show.

Eric: Thank you, Patti.

Patti: Yes. First, let’s go into that history lesson. We have been, as a nation, through a lot of different crises dating back to the early 1900s, but something has shifted. There’s been a paradigm shift in terms of how our government leaders deal with crises.

Why don’t you take us way, way back and bring us forward to help us understand why they’re making some of the decisions they’re making today?

Eric: Yeah, no problem at all. You can trace the origins of, and I love the way you phrased it, this paradigm shift in government policy to the Great Depression.

You have to understand how policy was conducted prior to the Great Depression, and in response to it, to understand where we are today. The response that occurred there still resides with us today, some, gosh, 90 years later.

I think you have to start with Herbert Hoover. His campaign slogan when he was elected was this idea of rugged individualism. As Americans, that message resonates with everybody, because we have always…It’s part of our DNA to think that we are individuals, a belief in small government and not intrusive interference from a government body, and so forth.

He was elected on this campaign, but what happened is, the Great Depression, the stock market crash occurred about seven, eight months into his presidency. As the crisis worsened, his ardent embrace of this promise, a rugged individualism, was antithetical to the notion that any government stimulus would be used to solve the problem

The prevailing fiscal orthodoxy at that time was that the market was self-correcting. That the government didn’t entertain ideas of activist policies of interfering in economics because the market would solve everything, and this invisible hand would come through and everything would correct.

The government policy up to the Great Depression was all about balanced budgets. The idea was that, with a balanced budget, that would instill confidence among consumers and businesses and markets, and that encourages investment. Ultimately, it is investment that sustains but also provides the foundation for economic growth.

Again, that was the prevailing orthodoxy, but what happened is when the Great Depression occurred, Hoover was…Not that he didn’t do anything. He instituted many policies and tried to work with businesses and so forth, but he was against the idea of providing direct aid to families.

His view, no government had ever done this before, and to provide direct aid was going to be ruinous to the morale and initiative of the country and edges closer to socialism.

He rejected growing calls for the government to intervene. Roundabout that time, the next election cycle, Franklin Roosevelt, his platform was based on the three Rs, providing relief, direct aid to families, recovery through government spending, and reform through the development of social safety nets, which we have today.

He won in a landslide over Hoover. Basically, he started unveiling these policies, which were completely different, as you said, a paradigm shift to what existed beforehand.

A lot of these policies were based on the teachings of John Maynard Keynes, who was a British economist during this period of time that advocated activist, what we call countercyclical government policies, where the government intervenes as a means to basically solve prolonged unemployment and so forth.

That’s where all of this came about that still exists very much in today’s fiscal policy.

Patti: I was fascinated during the break when we were talking about Roosevelt’s propensity to issue executive orders. I was blown away by the number of executive orders that Roosevelt was doing on a year-by-year basis. Nothing close to what leaders do today. Want to give everybody a feel?

Eric: I thought this is so fascinating when we were doing the research and the preparation for this podcast. Because you watch the nightly news today, they make such a big deal about executive orders being issued by presidents because this is a way that they can enact policies without getting the approval of Congress.

Whether or not they’re constitutional or not takes time to determine. If you look over, say, the recent three or four presidents that have been in office in our lifetime, 2 to 400 over their entire presidency, depending on whether they served two or three terms, is normal, so about 30 or so, 40 a year.

Roosevelt is the all-time leader. He was elected to three terms in office. 3,712 executive orders, an average of a little bit more than over 300 per year.

Patti: Wow.

Eric: If you think today that they’re abusing the executive powers, think about what they thought about Roosevelt in that day and age when he issued over 3,700 executive orders. Yeah, an interesting little tidbit that came out of the research.

Patti: The New Deal definitely went through the normal channels, right? It was Congress and the Senate all approved and said OK, we’re going to do this thing.

Eric: Yep. This is where, again, they started providing direct aid to families. Social Security was part of this, 1935 or 1937, I think, is when that came about, the modern-day Social Security system. It took a lot to get that, but there was significant economic improvement from 1933 through 1936.

He was elected again on a very strong recovery. He served three terms, which nobody can do nowadays.

The policies did work, and that gave them a lot of validity that this notion of deficit spending, the government doing the opposite of what individuals, you and I, households are doing, is a way to not eliminate the business cycle but reduce the amplitude of the business cycle.

Patti: Let’s get into that a little bit. Let’s go back and help everybody understand what that’s all about. We’ve talked about this before. Your spending is my income. My spending is your income. That’s the way a consumer-based society works. When there’s a crisis that occurs, what do we do? We all pull back.

We did this with COVID. Certainly, people stop spending money. Unfortunately, when we stop spending money, that means that somebody’s not earning money. Unemployment, skyrockets, GDP plummets, and we languish. We run the risk of going into certainly a recession, but a severe recession and maybe in even a depression.

The goal here for government is to step in where the consumer stepped out. To your point, to reduce the amplitude and the severity of the economic outcome of the crisis and to smooth things over until the consumer can start feeling confident again. More secure jobs, jobs start to improve, people get employed again, and we go back to a growing economy.

That to me is the most important. Always remember that someone else’s spending is your income. When that stops, something else has to happen. Otherwise, we could eventually get back into another depression. That’s how that happened.

Eric: Income and aggregate falls when everybody pulls back. But what you’re showing, and I think we’ll probably put up a chart for our viewers, is this wonderful, very simple way to look at an economy, which is called the circular flow model. Where basically, firms and households just continue to spend in the cycle.

We spend to give money to businesses, businesses then spend through paying wages and buying goods and services, which then provides money back to households, and it just continues in this circular format.

Patti: It provides velocity as well, because, that business can use that income to help even more people as a result of our spending. I think that that’s helped. A lot of economies are certainly recover in the more modern economy, in a more significant way.

OK, fine and dandy. $1.9 trillion, let’s just put it in there. Where’s the government going to get all this cash? I mean, we’ve talked about it before, Eric and let’s face it. When Obama was president, he issued an $800 billion stimulus package and everyone was freaking out.

Eric: I remember. That number, at the time, it was so astounding. So astoundingly large to think about $700 billion or $800 billion. This is a magnitude of order above and beyond that, it’s almost hard to wrap your mind around.

Patti: Over and above the $1.9 that we did last year, right? So where is the government getting this cash? Let’s just go, professor, and give everybody a quick lesson in terms of this concept of printing money.

Eric: When the government needs to pay its bills, how does it do that? It can raise taxes, which would be a horrible idea.

Patti: By the way, paying its bills includes supporting families, etc. That’s the government’s bills.

Eric: Exactly.

Patti: Unemployment, insurance, things of that nature.

Eric: Exactly, right. So one way is they could raise taxes, but Hoover already proved in 1931, what did Hoover do in the face of the Great Depression? He wanted to balance the budget by increasing taxes and cutting spending, that only ended up worsening the crisis.

Today, when the government runs a deficit, what they do is they ask the Treasury Department to sell bonds to investors. Now, there’s this idea that somehow the government just prints up the amount of money that they need. The United States doesn’t work like that. That’s not how it pays its bills.

If you look at, let’s say, the Federal Reserve puts out what’s called the Z.1 report, there are trillions, and trillions, and trillions of dollars in savings locked up in the financial system. These are bank deposits, money market funds investments, so when the government needs to pay their bills, what they do is they issue bonds to investors.

There’s a wonderful intersection, because when there’s a crisis, what do we just naturally want? What does our brain say?

Patti: The safest thing there is, which is treasury bonds. We want that safety and security that only a treasury bond can provide.

Eric: That’s right. The US government is the sole issuer of the risk free asset in the entire world, which is US government treasury bonds. So what they do, they sell bonds. All that money that is locked, that savings that is locked in the financial system, the government sells bonds, they get the cash, and then what does the government do?

They spend it and that creates income. Income for households and businesses through aid and direct purchases, transfer payments, and so forth.

Patti: Yep. Again, just to nail this shot, the treasury bonds, OK, who owns the treasury bonds? When we talk about “they”, always remember, we are they. We are a government of the people, by the people, for the people.

So when the government issues those bonds, and we buy them, whether it be outright or via a mutual fund, or a pension is…They tend to buy a lot of treasury bonds. We own the security. We own that. That’s part of our net worth. I found it interesting, and we didn’t talk about this, Eric. Larry Kudlow was on one of the channels a couple of weeks ago…

Eric: These guys don’t show it now I hear.

Patti: I know.

Eric: They didn’t take long, from on the government payroll, back to the private life on TV.

Patti: Absolutely. Good old advertising, works every time, right?

Eric: That’s right. He set himself up nice.

Patti: Yeah, and you know what? He was talking about how wealthy our nation is. The household net worth alone is $122 trillion. That doesn’t even include how wealthy our government is. Because our government again, our government is us because we are the nation of the people, by the people, for the people. So we own these assets also, but think about what the government owns.

They own all of those oil fields, real estate, tons, a lot of assets, is also part of our net worth. I’ve never seen anybody do a study and this is something that I’d love for us to do. How wealthy when you put the two of them together? I mean, I’ve heard that the oil fields alone are worth…Estimated to be $116 trillion alone.

Then you think about the real estate, you know guys, we own the White House. I think that’s a pretty valuable piece of real estate. What do you think?

Eric: I don’t know what it’s worth, but who knows?

Patti: Yeah. So, OK, I get that. So they issue the treasury bonds, I buy a treasury, they have the cash, they spend it. So basically, the federal government is providing a bridge for our economy, to replace the spending that we’re not doing temporarily. Again, just to get us through.

What is interesting to me is how they go about spending, how they choose to direct those funds, we’ll get into that in a minute. Let’s now talk about this thing called the output gap. All right? Why don’t you define it and then I’ll walk people through the potential versus the actual.

Eric: The output gap. Now, I don’t know about you, but I had this weird…As we were going through this and developing ideas. We started looking into the output gap and this concept of multipliers and what they call marginal propensity to consume, which we’re going to get into a minute.

I actually sat there and thought back to economics class, I’m like, “Oh, my gosh, I am actually going to use this, I can’t believe it.” Here it is, I thought I would never ever need this in my entire life and here we are, so there is a use it, believe it or not. Any people still in school listening, pay attention because you never know when you’re going to need something from class.

Patti: You got it.

Eric: So the output gap is you define it. When policymakers are trying to determine if stimulus is needed, and how much, they have to determine what’s called the output gap. The Congressional Budget Office or the CBO, they make calculations of what they call potential GDP.

This is a theoretical construct. It can’t be observed in reality, but potential GDP is really an estimate of how much output can be produced sustainably without creating inflation.

If we employ all of the available people out there who could participate in the labor force, how productive they are, this is an idea of the maximum output that we can sustainably produce, and then there is what we’re actually producing, and if we are below potential, you have an output gap. Pretty simple.

Patti: There’s your gap. Basically, folks, when you think about the output gap and the potential, think about it like the safe speed limit. You’ve got the safe speed limit. If you go too far below it, then we’ve got a lot of idle workers, idle factories. We’re not producing to the level that we probably can.

If we go too fast, then we’re going much faster over the speed limit, and that could cause other problems. Think about it in terms of the safe speed limit, and, as Eric said, it’s kind of…Well, these people are smart, but it can change quickly.

Eric: The important point here, which you and I see every day, which is when there’s an output gap, there is a real human cost to that. That means people are unnecessarily unemployed or underemployed. There is a human toll that is taken when you have a negative output, that gap that has real consequences.

People let go from jobs and trying to figure out how to plan and what to do. We see the result of that when we go through these periods. It’s very heartbreaking sometimes

Patti: It is heartbreaking. It is very real and very raw. It comes in the form of long lines, people going to food banks. Literally, people who used to work at the food bank are now in line, because they need the food themselves. These things have never happened to a lot of people before.

We’ll put this in the show notes, and we’ll put it on the video where you guys see the output gap, the graph that we’ve put together for you, you can understand very quickly why policymakers were as worried as they were and realized they needed to act really fast.

Again, it’s a moving target. It’s important to recognize that it is a moving target especially since the economy moves very quickly. You don’t kind of know until after the fact even that a recession is occurring. Certainly, it’s not declared over until months after a recession is officially over.

As we said, it is a messy art form. While it’s effective over time, it’s one that needs to be monitored. We have to be cognizant of the unintended consequences of some of the policies that are coming out.

Eric: Yes. What’s so interesting, what you talk about, is this idea of a moving target because. The Congressional Budget Office uses very complicated statistical models run by PhDs, very smart people, but you’re trying to forecast something in the future that is ultimately unknowable.

When you and I looked at the revisions of the output gap because the CBO will produce revisions as time passes. If you look at, say, last fall, if you think about where did the $1.9 trillion come from, keep in mind that they don’t write a bill in a week. This is months in the making.

When the CBO came out in October, the output gap was huge for 2021 and beyond.

Patti: I will tell you, Eric, it was exactly $1.850 trillion over a two year period of time. That’s what they were projecting. So, “Voila.” Now I get it. $1.9. They’re going to inject $1.9 to fix the $1.8 gap and here we are. Fast forward, what’s the latest revision of the output?

Eric: Wait. Are you saying there’s a problem?

Patti: No. No problem, whatsoever. All right, good.

Eric: That’s what was so astounding. For us, because we operate in the financial markets, it was very encouraging news that the output gap had incredibly shrunk. It went from, what, for two years, from $1.8 trillion to $600 billion.

Patti: Right.

Eric: That’s wonderful as an investor because that shows great signs of improvement.

Patti: I can’t help but wonder if that has something to do with the $1.9 trillion that was passed last year because, as we all know, it takes a while for it to get into the system. It doesn’t happen overnight. Here we are, February. The gap is much smaller, but what just got passed?

Eric: It’s hard to even say, I’m sorry. $1.9 trillion with a “t” to solve a problem that has now become $600 billion.

Patti: Again, to Eric’s point, it’s not to take away from the people who are still struggling. There are people who are still struggling.

What was different with this particular package was that it seems to be aimed at the families who are still struggling. The people who remain unemployed, the families with young children. Some of these things are directly targeted to those people to give help right away.

Those people can’t wait for three or six months for it to work its way into the system when they can get their new job and start working again and earning money and bringing food into the family. They need money now.

When we talk about this, we talk about it within that framework and understanding that this is really important. This is what our government is for. I will tell you that I’m happy that it got passed. Yet, at the same point, we have to be aware of what could happen on the other side.

Eric: What’s interesting is now we might venture a little bit more into the theoretical angle of stimulus, but it’s this idea of multipliers. It is not to say necessarily that 1.9 trillion is more than you need.

It could be exactly right. It might actually be not enough. It depends on this Keynesian concept that was espoused back in the 1930s of marginal propensity to consume. If the government spends one dollar of stimulus, that’s great. You and I as individuals, we have choices. We might spend it, but we could also save it. We might use it to pay down debts.

When policymakers put these together, they are dependent or hopeful that the money will be spent. Because if you save or invest, that money is not creating income for somebody else in this circular flow between households and businesses.

It’s this marginal propensity. What is the multiple? If I spend a dollar, how much of that actually gets spent? Sometimes it’s more than a dollar, sometimes it’s less. It depends on who you give it to.

Patti: Eric, I want to frame something because I never want to assume that our listeners know this stuff. When we invest, let’s take that concept of investing, investing into the stock market. Let’s say that you’re buying Amazon stock. You all need to know that that’s not helping Amazon. Amazon is not getting that growth.

There is an indirect benefit that Amazon might get, but they don’t get that money. It’s not like if their stock doubles in price that they’re given that money so that they can hire more people. Again, to Eric’s point, we either spend the money, save and invest it, or we pay down debts.

You can begin to understand why policymakers may target particular families, people who really, A, need it, lower income people, people who may be out of work, and, B, the people who are more likely to spend it because that’s what’s going to improve the economy.

Saving, investing, and paying down debt doesn’t do anything for the economy. That’s what a policymaker needs to focus on.

The idea of the multiplier, to me, brings it all home in a way that OK, now I get it. It doesn’t necessarily mean that all this money sloshing around is going to lead to ridiculous amounts of inflation because, to be honest with you, not everybody’s going to spend it.

For every dollar, depending on where it’s targeted, you might get a multiplier of 0.6, for example, or 0.4. It has less of an impact. It still has an impact but not quite as much as you might think.

Eric: Absolutely right. The question is you want to direct the spending policies to people that have a high likelihood of spending it. That would be, for example, increasing unemployment benefits.

Even with these direct stimulus checks, they are putting an income limitation on it. It’s not going to people at the higher levels of the income scale who are probably more apt to save it.

If you take the current package that’s been out there, it’s 1.9 trillion. When you break it apart, something like roughly 50 percent of it goes to direct aid and Supplemental Nutrition Assistance. Another 40 percent, I believe, goes to states.

Those are things that are likely to have high multipliers because people in need or state governments don’t have an incentive to save, so they’re likely to spend the money. There’s likely to be a high return on those dollars that are flowing into those different entities.

There is a intelligent design behind it. The question, because things have improved so much, would be is it enough, or isn’t it enough? Consensus views on that, they’re…

Patti: All over the map.

Eric: Yeah. I should say professional forecasters are all over the map on that.

Patti: Let’s keep it real. What are the risks? What are the risks of an undershoot? What are the risks of an overshoot? I think about what they did during the financial crisis.

We’ve talked about this before. Every time we have one of these things, our leaders learn. What they learned from the 2008 crisis is that the stimulus was good, but it took too long for it to be effective. The economic recovery was quite lethargic.

Unemployment, we didn’t get to follow employment for many, many years. The economy never really got up to that juicy three percent average GDP that is the target.

The one thing that they’re trying to avoid is having that story repeat itself, so they’re flushing the economy with trillions of dollars. What’s the risk of an overshoot? How are we going to know it? If it does happen, Eric, what in the world are going to do?

Eric: I don’t know if we can bring up that slide of the output gap here for this. You make a great point, which is they had massive stimulus, but look how long it took. It took almost 10 years from the financial crisis until we finally got back to potential. It took that long that we were underperforming.

The lesson, as you correctly point out, is that policymakers would much rather favor an overshoot and to try and flood as much into the system as quickly so that the recovery is much faster. We don’t have this very long, drawn out period.

You’re right. If they overshoot, and they overshoot dramatically, what’s the outcome? Most people would worry about inflation. That would be the big outcome.

It seems like the Federal Reserve is communicated. They are more than willing to allow inflation to be above target for some period of time. They’ve got new guidance on that. They seem confident that they have the tools to rein an inflation if it becomes a problem.

Patti: The new target, for those of us who have been around for a little while, is above two percent. I will tell you that when I first started over 30 years ago, the thought of a two percent inflation rate was like Nirvana.

It was riding at six percent, seven percent. Our mortgages were much higher, etc. That’s a very low inflation rate. That’s what our leadership has determined that is very sustainable. Let’s pull this together. By the way, we can talk about the Federal Reserve and all the tools they have to dampen the inflation.

Eric: I might refer our listeners back to the wonderful podcast we did last year, part one and two on the national debt. There’s a lot of parallels between this and that.

Patti: You know what we should do also? I’m going to do this. I’m going to commit to this. Let’s take our papers, the work that we did to prepare for those podcasts because we weren’t filming at that time.

We’re going to put those on the website. There, you’re going to see how the story unfolded, all of the graphs and charts, and the things that we did, and the research that we did over the summer.

I will try you, I was taking a course from Professor Fuhrman. I might have thrown in a point or two. It was interesting stuff to the extent that you want to understand this. At the end of the day, we just want to share the information in a way that, hopefully, you can understand it and give you confidence that while it is messy, they’re figuring things out.

Number one, we have the benefit of a rich history. Boy, do we ever. We’ve been through a lot on this nation. Little by little, slowly but surely, we seem to be getting out of these crises. It’s not that we don’t have them. It’s just that we know what to do when it happens.

We learned how deficit spending is used, and how it’s used, and why it’s used to bridge the gap so that the depth of the crisis isn’t nearly as deep as it would be normally.

Last but not least, we learned about the output gap and where our leaders come up with this magic number of $1.9 trillion, and how they think about who’s going to receive that, and how that’s going to come into the economy.

Eric: Maybe a good way to bring it to closure that you and I were talking about is that now, we’re starting to see economic estimates of what the growth forecasts is going to look like, not only for this year but next year. It’s eye popping in terms of numbers. This fiscal stimulus has a lot to do with that when we think about our near term outlook over the next one to three years.

Patti: We talked before about Ben Bernanke’s 60 minutes broadcast. At that point, he talked about the fact that he was beginning to see green shoots coming out of the ground. Let me tell you something. This is bamboo. This is growing like crazy. Estimates are close to six percent GDP for this year alone.

It actually trends down. It’ll be very interesting. I know we’re nerding out on you, by the way. I apologize for that. It’s comforting. I like to read and understand this because it makes me feel more confident in our leadership. We’re going to figure it out. That’s the way these things tend to work.

Eric: Nerding out is OK. My favorite times at Key Financial is when you nerd out.

Patti: Totally. Eric, one thing that we have to remember also is that we’re all doing this. They’re all doing this. We’re having all this stimulus in the midst of something that never happened before. That is six foot social distancing. We’re not able to go out there and spend the money that we normally would. What does that look like?

Eric: There is a well established history where academics can go back and figure out how effective stimulus was after the fact. You never had to it when social distancing was there.

Part of me thinks that, yes, the package seems larger than the problem, but you’ve never had an issue with social distancing. How effective can it be in an environment like we’ve never ever seen before? We’ll learn a lot. I know that much.

Patti: Hey guys, I’m still Latina. There is no alternative. People are saving it and investing it. That has something to do with why the market has been going up as well. Not everything. There are real, fundamental reasons, but there’s no other alternative.

Anyway, fun as always, Professor. Thank you so much for all the research and the back and forth you and I did over the weekend. I appreciate that, and I appreciate you.

These podcasts don’t happen unless you are tuning in, and you are listening. We are hearing so much from you. I’m so grateful that you make us feel as if this is worthwhile, that it’s making a difference in your lives. Honestly, that’s what it’s all about.

I’m Patti Brennan, Key Financial. Eric Fuhrman. Thank you, Professor. I hope…Go ahead.

Eric: Highlight of my day.

Patti: Highlight of your day. Now we going to get back to work. I hope you all have a terrific day. Take care now. Bye Bye.

Ep67: Sustainable Investing and Government Policies presented by Shroders

About This Episode

In part two of this two-part episode, Patti continues her conversation with Sarah Bratton Hughes, the Head of Sustainability at North America for Shroders. They delve deeper into how governments can influence investor and consumer behavior by imposing new laws and tax policies. With recent Presidential actions, the United States is positioning itself in a leadership role and will most likely influence a significant increase in global climate action. Various industries and markets around the world are evaluating everything from their labor practices to their environmental impacts, to make sure strong governance is in place that will result in more positive environmental or social policies. Investors are looking to maximize long-term returns by understanding which industries and markets are compliant or moving towards sustainable practices.


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.

By popular demand, we have Sarah Bratton Hughes back with us. Now before we get started, I want you all to know that Sarah is the mother of a five-and-a-half-year-old. Today is the early day of school. Before we started Sarah said, “You know Patti, I hope that my son stays out and doesn’t interrupt us, but just so you know, in case he does, I tried to keep him out but he might interrupt us.”

I will tell you all who are listening to this, I said, “Sarah, you’re talking to the mother of four children. Believe me, I get it.”

I can’t tell you the number of times I was talking with clients, and I would literally have that panic look on my face like, “No, no, don’t say anything.” I would put my finger up to my mouth, “No, no, be quiet, be quiet, be quiet.” The kids would tiptoe and etc. Hey, if your son needs to come in, if you want to put on your mom hat, by all means, have at it.

In the meantime, thank you so much for joining us today.

Sarah Bratton Hughes: Thanks, Patti. Thank you for having me.

Patti: What’s your son’s name?

Sarah: AJ, Andrew James.

Patti: AJ, OK. AJ, listen up to your mom because we have America listening to her today. Be forewarned, she is the expert, and you got to listen to her also. Let’s start out. Let’s start, pick up where we left off in the last broadcast. It was really interesting.

We were talking a lot about policy, and how governments can influence behavior whether by imposing new laws or tax policy, etc. What would you refer to in terms of the factors? I understand this term float around ESG factors referred to as non-financial factors. How do you think about those when you’re selecting securities? What’s the data that goes around all of that?

Sarah: Sure. The first thing I think about is that you often hear as ESG factors as being referred to as non-financial factors. I actually think that’s a mess. ESG factors are pre-financial factors. Why do I think that? Let’s just take the S&P 500. In 1975 just 13 percent of the S&P 500 was in intangibles.

If you think about intangibles as human capital, R&D, basically all those things that you can’t touch, like your plants, your products.

At the time, the S&P was 13 percent of that market value was in the intangibles. Today, that number is 90 percent of the S&P is now in intangible. That’s in people, that’s in R&D, that’s in patents. It’s in all of these intangibles that are hard to put a hard market value on.

Also, what is important, and we saw this in the construct of a lot of people trying to understand how financially material sustainability or ESG factors were. If you look at your same S&P 500, and you look at the 10 K, so these are the official filings that companies placed with the SEC that talk about the risks to their business model, the top 100 companies…

We looked at the top 100 companies within the S&P 500 of them, all of them have at least one ESG risk in their 10 K. Most of them have multiple. What’s that saying to me is that if these factors are important enough for companies to file as risks with their regulators, they’re important enough for us as investors to be taking into an account when we’re making investment decisions.

We look at a number of factors, and we actually focus on the stakeholder model. Rather than breaking it down simply into E, S, or G, we’re focused on how a company is managing all of its stakeholders, all of its material stakeholders, because to us that’s key to how not only will they survive in the future, but how they’ll thrive in the future.

We’re looking at it holistically from a stakeholder perspective how a company is treating its customers, its employees, the environment, regulators, communities, and also just as important shareholders. Us, as shareholders, we’re a stakeholder as well. We focus on it much more from a materiality perspective. I’ll use Schroders for an example.

Schroders, we’re an asset management firm. First and foremost, we have to be the leader at maximizing risk-adjusted returns for our clients. Our customers are a very large stakeholder. We’re a service industry. Our employees, there’s a lot of human capital that goes into our roles here. They’re a very important stakeholder.

The third very important stakeholder is we operate in 32 companies around the world. The global regulators are definitely important stakeholders to us. Very different if you’re looking at somebody like an airline, who’ll be focused on customers, regulators, but the environment, a large stakeholder with there.

We’re focused on understanding the material stakeholders per industry, per jurisdiction that a company is operating. Then we’re using both traditional data but non-traditional data to help us assess how companies are managing those stakeholders over time.

One of my favorite stories about what we do in terms of using non-traditional data is we’ll often look at companies’ Glassdoor or their local equivalent scores. Before everybody rolls their eyes at me, we will never trade off the Glassdoor score.

We know that most people that go to Glassdoor to write reviews are employees that perhaps aren’t the happiest, but that’s, as investors, what we want to understand and what we want to find out.

Most managements that come in and speak to us are only telling us about 30 percent about what’s happening in their company. Very rarely do we have a management team come in and say that they have a poor corporate culture or their employees are unhappy working there.

For us, we had an Indian bank in one of our portfolios. We found that their Glassdoor equivalent two branches were flying to us for having aggressive sales tactics, a high-pressure environment, and a poor work-life balance.

Many of you on this podcast will automatically start thinking of a big US similar bank that had a similar problem. It resulted in fake accounts and significant reputational as well as litigation costs for that company. That was the first thing that went off in our head.

We decided to engage with the management team on that holding and what we were focused on was understanding what policies and procedures they had in place and what they were doing to ensure that they wouldn’t have a similar type of scandal.

This particular Indian bank on a Friday night in India got on their CFO, the CEO, their head of HR, as well as the two branch managers within the two branches that were having the largest problem.

We were satisfied, from an investment perspective, that there wasn’t that risk there in terms of the scandal, so we continued to hold the position and monitor. That’s just an example of how we’re using both traditional and untraditional data to help us look at some of these factors that wouldn’t traditionally show up on a balance sheet or an income statement.

Patti: That’s so interesting, Sarah, because you and I both know the name of that bank here in the United States. It’s very interesting. I got to tell you, I’m very impressed because if you were with a different firm, a different firm might just say, “We’re going to sell this. We don’t want this. We don’t want to own a bank where this could happen all over again.”

Instead, what I’m hearing is that you chose to engage with senior management and help them to begin to change that culture and make sure that they address that issue so that they could continue to grow and take care of their employees, and reduce that high-stress culture and the domino effect that often occurs in terms of their business practices.

I’m just impressed. I wouldn’t have thought, but perhaps I should’ve known better because I know Schroders. You guys operate at a whole different level in terms of…Not so much activism. Again, what I’m hearing is that you just wanted to understand, give them the feedback that you had learned, and get a sense of how they might respond.

Awareness is the first step in any problem and pointing it out. Clearly, senior management was receptive to that feedback. They may not have appreciated it. They may have been maybe a little surprised. Calling them out on it, kudos to them because they did something about it too.

Sarah: Yes, definitely. I would say we’re active owners who are not activists, particularly in the traditional sense of the word. It’s about engaging and really unlocking that long-term value for our clients.

Patti: Let’s do a pivot here. I’m really curious of what you think about some of the more important policies that were just enacted by President Biden. There are a lot of stuff that happened very quickly once he got into office. What are your thoughts about all of that?

Sarah: I think particularly regarding the flurry of executive orders we saw on day one, there was a lot packed in there, and there was a lot packed in there from a sustainability perspective. A lot of it, not as surprising, at least, from my seat.

There’s two reasons for that. One, that the Biden Harris campaign did have a campaign that was much more focused around equality, whether that’s an environmental, justice, or individual equality. You had that focus within their campaign. Then, what his actions before he took office, really proved that it was not just rhetoric.

You saw him named John Kerry as climate czar to the National Security Council. The first time you’ve ever had anybody on climate focused on that. You saw Gina McCarthy heading the EPA, a fellow graduate of Fontbonne Academy out of Milton in Mass, so Go Ducks. I would like to highlight that.

You saw Brian Deese, who was the former head of sustainable investing at BlackRock. He’s part of his National Economic Council. I always say actions speak louder than words, and his actions were actually speaking just as loud, if not louder, than some of his campaign promises.

Patti: If I may, let me talk about the elephant in the room because I think that a lot of people were surprised on him closing down the Keystone Pipeline. It was cold turkey. Did that surprise you?

I don’t know, maybe he did campaign on that. I don’t recall, but I think the fact that that happened so quickly after him getting into office surprised some people. Then what’s the message that he is sending with that action?

Sarah: I think with that action combined with his other executive orders, he is sending a message that he wants the US to be a leader on climate action. I don’t think I was surprised about the Keystone Pipeline because of the amount of climate that they had focused on, or climate promises that Biden had made throughout his campaign.

Harris actually didn’t make a lot of headlines, but four days before she was announced as the VP nominee in the summer, she had co-sponsored a bill with an OC really focused on climate change, and both climate as well as economic justice.

What I would say, and we had touched on this a little bit in our last podcast, on the White House site, you can go in and read about each one of these executive orders.

For those in the US, I think a lot of concern about is, “OK, you’re shutting down our pipelines, but what about a lot of big emitters that are not here? There’s a lot of other countries in the world who are larger emitters, aren’t doing anything about it. They’re going to have the economic advantage because their costs are going to be lower.”

What I think should give comfort to those who are very concerned, not only about what’s happening in terms of emission within our own borders, but also outside of our borders and particularly around the argument that if we go all-in on green, there are other nations in the world that would continue to use fossil fuels, and it will be more economically favorable for them.

What is important to understand within the revoking of the permit for the Keystone Pipeline is that there was clear acknowledgment that most greenhouse gas emissions originate beyond our borders. That the US is prepared to utilize vigorous climate leadership in order to have a significant increase in that global climate action.

You now have the US alongside the EU, particularly putting their flags in the ground on being climate leaders.

Patti: That’s really interesting, and that was their way of sending that message. When they do that, they are acknowledging that maybe temporarily, it’s going to be painful. I thought the point that you brought up in the last podcast was – for me, it was a real epiphany – that actually some of the green technology is more economic than fossil fuels. That to me was incredibly helpful.

Sometimes you do have to take away the candy jar and make it cold turkey which is what that felt like. You shut down the Keystone Pipeline. All of those jobs are lost. Again, I’m playing the other side of it, couldn’t we wean down off of that?

I think it’s important for listeners to understand that the pipeline was being built. Why build something that you don’t want to encourage Americans to be using, the fuels that are going to be flowing through those pipelines?

Let’s stop that. Let’s stop investing in that. Put that money towards other things that, frankly, short-term pain, but long-term gain, are actually more economical than using fossil fuels. Do I have that right?

Sarah: Yes. I’m going to say something that is pretty controversial amongst my peers in the sustainable investing universe is that, and I’ve said it before…

Patti: Go for it. Go for it, Sarah. I’ll…

Sarah: I hate the term ESG investing. Many people say, “Why do you hate that term?” It’s because it elicits an emotional reaction from people.

Half the people in the room are super excited and want to hear what I say. Half the people are in the room rolling their eyes and thinking that I’m out hugging trees and saving the world.

When you take it out of that ESG investing, and you talk about it in terms of the long term sustainability of a company’s business model, the durability of cash flows, and returns over time, then you’re speaking everybody’s language. That’s really what sustainable investing is. Yes, it’s a different way of hitting the home the same point that you had just said, Patti.

Patti: Sarah, just for our listeners, can you define what E stands for, what S stands for, and what G stands for?

Sarah: Sure. E stands for environmental and probably the most controversial from a US construct, the least controversial from a European’s construct, [laughs] is on environmental and how you’re taking accounts, the externalities that you create on the environment within your investment process.

S stands for social. You’ll be looking across…And social is a very broad bucket. It can withstand everything from cybersecurity to diversity, to human capital management labor. What labor is used throughout your supply chain. Very broad bucket on social.

G. Somebody else referred to this, but I love this phrase is, “G is governance.” That’s the mother of E&S. That’s having the strong governance in place that’s going to result in more positive environmental or social policies.

I always say I don’t love the term ESG investing enough for that ET, because many people think it’s sacrificing return at all costs to have a greener environment.

Sustainable investing is quite the opposite. It is understanding and analyzing the externalities that your investments create and understanding how they could impact their value over time. I’m looking to maximize long term return.

Patti: It’s interesting because your visceral reaction to ESG is like my visceral reaction to the word budget.

People just don’t like the word budget. It’s got a negative connotation and it makes people feel like they are giving something up, that there’s sacrifice.

We call it defining what your cash flow needs are. It’s not a budget. You’re not giving anything up. You’re defining what you would like to have coming in on a monthly basis and how that is going to be used. That is so interesting how it also relates to ESG.

I see that also. You do get the rolling of the eyes and tree-hugging kind of response, and then you’ve got people who are passionate about it. The sustainability argument or the focus on sustainability, that is what it truly is all about.

Here’s a question. We’ve seen sustainability, ESG, whatever you want to call it. That has become a greater focus in markets. Frankly, a lot of those companies and markets have already risen sharply. Do you think that it’s too late to invest in those industries that are focused on ESG and sustainability, or do you think that there’s some runway left?

Sarah: I think there’s a massive amount of runway left for more than a few different reasons. I would say maybe at the tails, you have some industries that have been priced to perfection. You’ve had some industries where a baby has been thrown out with the bathwater. Actually, where you have the ability to make a lot of money is on this 90 percent in the middle.

From a policy perspective, there’s a lot coming down the pipeline very quick and furiously that are going to or has the ability to shift valuations within your portfolio very quickly. We are seeing increasing calls for costs of carbon globally. 25 percent of the world’s carbon is now being priced.

Even China is going to begin pricing carbon – albeit not what we think it should be even be close to – but they’re going to be putting a price on carbon.

What we’ve seen in the executive orders that was actually buried in one executive order – I pulled it out as its own for our investors here at Schroders – is the Biden administration has started a committee to look at the social cost of carbon, the social cost of nitrous oxide, and the social cost of methane to estimate and monetize the damages associated with the incremental increases of greenhouse gas emissions.

They’re asking for interim recommendations very shortly, early in the summer, and then final recommendations by January, 2020. It’s not just here or what we’ve seen happen north of the border, north of us. Canada has actually come out and put a price of carbon to reach to $170 a ton by 2030, one of the most significant prices out there on the market.

What we’re seeing is pockets of this carbon pricing coming up. If that happens, we’re in for a hockey stick type transition across a number of industries, my own industry, the asset management industry, is not avoided at that. If you look at Scope 1 and 2 emission, so those are direct emissions. You’ll see that asset management is nowhere on the chart at all.

We work in offices, the most emissions that we have from a direct perspective is flying around on airplanes to visit our clients. However, if you look at downstream Scope 3, so that’s the emissions within our supply chain. That’s the emissions in our investments, that’s where 97 percent of emissions live from an asset management perspective.

The industry itself actually moves up to third, right behind our oil and gas industry. You’re going to see industries that you would probably not associate as high carbon-intensive industries. They’re going to be exponentially impacted. I also think from a theme perspective, it’s constantly ever-evolving and ever-changing.

That’s what’s interesting about sustainable investing. One of my favorite themes that I’m doing a lot of work on right now has nothing to do with the environment, it has to do with this concept of quality jobs.

What the concept of quality jobs is how you deliver a double bottom line return, how do you invest in your employees, and treat them as assets, instead of treating them like a liability line that has historically happened here in the US, as investors have looked at companies how to minimize costs, all too often it happens at the employee line?

Well, you can only cut costs on your employees so long before it comes back to you in terms of turnover, in terms of poor service, in terms of disengaged employees, costing you market share and market value over time. Concepts like these that are maybe not their traditional sustainability concepts that people think about everybody flocks to the environment and climate.

You’re going to see other concepts coming out that there’s going to be significant tailwinds from the somatic perspective on how you invest in them. There’s also significant value to be unlocked as well when you’re really challenging some of these traditional norms.

Patti: That is so interesting. I love that theme, quality jobs. When you elevate an employee, when you elevate another human being, it’s got a multiplier effect that I don’t know that many companies take the time to measure that. From my perspective, it’s powerful, absolutely powerful.

Sarah, I can’t thank you enough for joining us today. This was fascinating. I can’t thank AJ enough for listening to his mom and letting her bring all of her brilliance out to us and all of our listeners. Thank you both for joining us today. It was fascinating. This is the beginning of hearing from you and Schroders on this topic. When I think about sustainability, I think of Schroders, so I’m so grateful. I can’t thank you enough.

I’m grateful to Schroders for taking us up on the invitation to join us today. Thank you, Sarah.

Sarah: Great, thank you so much. Thank you for having me.

Patti: Thanks to all of you for joining us again. It’s been wonderful to invite you into our office in this manner through the podcasts. Thank you so much for your feedback. If you ever have any questions either based on this topic or any topic, please feel free to go to our website at keyfinancialinc.com. Until next time, I’m Patti Brennan. Thanks so much for joining us today.

Ep66: Sustainable Investing: Pro Tips from Sarah Bratton Hughes of Shroders

About This Episode

There has been a shift in thinking when it comes to socially responsible investing – and it’s not only an important issue with millennials! In today’s episode, Patti is joined by Sarah Bratton Hughes, the Head of Sustainability at North America for Shroders. Sarah defines the three categories of sustainable investing and explains what changes she is seeing in the global markets as a result of investors and corporations looking to make socially responsible decisions. As nations around the world shift to clean energy and technologies, institutional investors and asset managers are answering the new demand for these investment products. In the first of a two-part series, Patti and Sarah identify the opportunities now available to maximize returns on these investments and also the environmental benefits that come as a result.


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. We are so excited to have Sarah Bratton Hughes with us.

Sarah’s with Schroders, and she is Head of Sustainability for Schroders. This lady knows everything there is about socially responsible investing, or what is often referred to as ESG or SRI or SDG. Lots of different names, and frankly, they mean different things depending on what you’re looking for.

Sarah, thanks so much for joining us today.

Sarah Bratton Hughes: Thanks, Patti. Thank you for having me.

Patti: I just threw out a whole bunch of acronyms. When we think about socially responsible investing, especially over the last year or so, we saw a lot of emotion as it relates to equality. Whether it be gender equality, climate change, clean water, lots of different things that people feel very passionate about.

It’s wonderful because here we are in America, and we can voice our opinions and our thoughts. I can’t think of a better way to do that than also put your money where you feel things need to change. What do you think about that?

Sarah: Yes, I definitely agree. One of the most challenging parts about being in the field of sustainable investing is sometimes the alphabet soup of acronyms that are referred to when we’re talking about this.

I think about it across a spectrum. My preferred term is sustainable investing, focusing on that all-encompassing stakeholder approach, in which a company’s sustainability practices are paramount to the investment decision.

Yes, ESG analysis forms the cornerstone of that investment process. If we think across the entire spectrum with often known as sustainable investing, down one end you have what I would consider integration. That’s where you’re looking to obtain the financial benefits of systematically incorporating sustainability as part of your investment process.

If you move over to the right, you have more somatic investing. Sometimes how it’s termed is SDG investing, investments that are targeting solutions for the UN Sustainable Development Goals.

If you move one notch over to the right, I would then consider much more socially responsible or values-based investing or sometimes also called screened investing, where you’re screening out certain industries that you don’t want to have, from a value perspective, exposure to in your portfolio.

You can remove it or even further to the right where you have impact investing, where your targeting impact is crucial, alongside the return and then finally all the way over on the far this part of the right-hand spectrum is philanthropy where you’re investing and expecting no return, whatsoever.

There is a broad spectrum when it comes to sustainable investing. Interestingly, I like to also say, just to add another acronym and here, is focused on the ABCs. I think this is also a great way to organize it when you’re thinking about the whole spectrum of sustainable investing, and this was developed by the impact management project.

It puts sustainable investing into three categories. A, that’s avoid, so that’s the do no harm. That’s when you will have some of these value-based strategies, where you will screen out certain industries. You’re looking to manage your sustainability exposure from a risk perspective.

You move over to B, and that’s for benefits. You’re looking to benefit your return alongside benefits that have been stakeholders.

Within B, those who go broad-based sustainable solutions as well as your integrated funds that are systematically incorporating sustainability as part of their investment process. Where the market is moving right now is away from some of those broad-based sustainable or ESG strategies and moving into the C bucket.

That’s contributing to the solution. That’s where you’re finding somatic and impact products that people are looking to allocate the funds that are focused on climate change, energy transition, diversity.

You’re seeing a lot of funds continuing to grow here. You’re seeing a lot of assets go here. Quite candidly, you’re seeing a lot of innovation for different solutions that people are looking to target in the C category.

Patti: That’s interesting. What does C stand for?

Sarah: Contribute.

Patti: Contribute.

Sarah: A is avoid. B is benefit. C is contribute, so contributing to the solution.

Patti: That’s phenomenal. When I think about sustainability, that speaks to me, Sarah. Honestly, what we do was very similar as it relates to people and families. We want to make sure that their assets can sustain them for the rest of their lives.

It feels like this longevity is a part of it, that we want the earth to be here for a very, very long time, and I think it’s terrific. I think that the fact that the market seems to be moving more towards that C. Let’s focus on the solutions, and really fund those potential solutions.

Before we got on live like this, we were talking about this whole concept of carbon capture. Does it make sense to really focus on the nasty stuff that our cars emit, and capture it in the atmosphere? Would that be a solution rather than having us lose thousands of jobs because we’re closing down a pipeline?

It’s a different way of solving that problem. I speak, you’re the expert. I don’t know that anybody is truly the expert on these things, in terms of where we are, as it relates to that technology and the practicality of its application. What are your thoughts?

Sarah: I think what is first and foremost as I say, there’s…Many people often think of what kind of jobs are going to be lost? I always point to the great state of Texas, because everybody looks at them as our large oil-producing state.

Actually what’s going on behind the scenes in Texas is really phenomenal. They’re our largest producer of renewable power out of all the states in the US right now. You are seeing a transition occur within the economy. It’s also a very…I’ll use the term “Just transition.”

Thinking about…there are many people. It’s the same topic for something like coal. What you see happening – particularly around the utilities that are shuttering down these coal plants – they’re very conscious that they are in many towns, the economy there.

They’re providing job training, they are providing education, to ensure that that economy continues to thrive in the future. I think that it’s not just as simple as shutting some of this down, as it relates to carbon capture storage. I think that’s a really interesting technology.

It is something that is continuing to grow. What I’m really watching is how politicians and how countries are embracing it from a policy perspective. Over 50 percent of the world’s population lives in areas that have made Net Zero commitment. That is almost no different here in the US.

One third of Americans live in communities that have made Net Zero or decarbonization commitments. Key to that will be the growth of hydrogen power, and key to the production of green hydrogen is carbon capture storage, as well as the production of electrolyzers.

What’s really important, what’s really interesting, where this gets really interesting from an investment perspective as you’re looking as you said, you like to do with your families, it’s first that preserve, and then the growth.

From an investment perspective, you’re seeing this massive shift and this growth into these technologies that are going to allow us to meet these Net Zero commitments that we’re seeing pop up, not only in countries around the world but also with both asset managers as well as some of the leading institutional investors we have here in the US as well.

Patti: When you talk about Net Zero, basically, what I’m hearing is that the goal here is not to make things worse. The fact is if we continue doing everything we’re currently doing, our children and grandchildren – and maybe even ourselves – are going to be in deep trouble, that we’re already seeing the impact of these choices that we’ve made.

Net Zero would…OK, it is what it is. Let’s just not make it worse. What do you think about the idea of 50 percent? What about the other 50 percent, because we’re all part of that same atmosphere? Why should we take the economic risk of changing the source of our energy when other nations don’t care, that they’re not going to do it? What are your thoughts on that?

Sarah: A couple of different thoughts on that. What we’ve seen happen, we’ve seen significant policy happening out of Europe. We are seeing significant indications of policy coming out here in the US.

There’s also talk not just only on Net Zero but there was this wonderful 660-page report issued by the UK on biodiversity this morning that also spoke of the concept of border tax and implementing tax on some of these economies that are heavy pollutants and not making that transition to Net-Zero.

What I think is really important, just to take a step back because I think policy is the third leg of the stool. We’re two-thirds of the way there already in terms of not just taking it broader than green transition and green solution but all of sustainable investing.

Hitting on a lot of the themes that you’ve touched on early on in the podcast, Patti, is that we have, from an economic standpoint, in many cases green energy and renewable energy is a lot more economical than legacy fossil fuel. That economics is really going to drive the transition.

It was a signal to the market and a signal here in the US when in October you saw NextEra overtake Exxon Mobile in terms of market share. NextEra is our largest producer of renewable energy here in the US. They took over Exxon in terms of market share on the S&P 500.

To me, that was a signal of where the future was and where the future is going, and much so from an economic standpoint. I don’t think any of us five years ago could ever have imagined that, and maybe not even three years ago, any of us in mainstream population.

The other bit is you’re seeing this end-consumer demand and that end consumer demand significantly start to rise. Schroders does a Global Investor Survey every year. There’s two things I would like to highlight.

In 2019, we saw this massive shift. Historically, it had always been, “Oh, the millennials and the women, they’re the ones that really care about sustainable investing.”

Actually, in 2019, we saw a shift where Gen X started leading the pack. They were more focused on sustainable investing than any other generation. We saw not only a continuation of that in 2020, but we also saw a broadening out across all levels of generations caring about sustainable investing, including baby boomers.

The other bit is that there was a real shift this year how people thought about sustainable and ESG investing, and it was on the return perspective. Historically, I had gotten a lot of push back from investors saying, “I don’t want to sacrifice return to invest sustainably.” That’s really not the case at all.

However, I do think today’s sustainable investing did get its first test in the early innings of the COVID crisis. It really proved itself to no longer just be a bull market luxury.

What we saw in our Global Investor Survey is that 55 percent of Americans now feel like if they don’t invest sustainably, they’ll miss out on performance. This was a real mind shift from what we had seen happen historically. Actually, this is a real mind shift or divergence from the rest of the world.

The rest of the world often thinks about sustainable investing from a beta or a risk perspective, where Americans are really focused on that alpha perspective. We are seeing a significant amount of capital that is going to have to move to meet both the goals of Paris as well as the UN Sustainable Development goals.

We’re seeing a massive amount of shift of capital in motion. I think that there is a real opportunity not only to maximize return but to maximize return and leave society a better place.

Patti: It’s fascinating to hear those stats because we’re seeing this in our own firm. People are talking about sustainable investing more and more. What I find fascinating is your point. Clean energy, for example, is actually more economic than investing in companies that focus on fossil fuels.

I can’t help but wonder what those companies are doing, the Exxons of the world, in order to catch up. Are they going to be the next Kodak, for example, that didn’t believe the writing on the wall and will become the next company that’s the has been, or is this just a temporary glitch?

Based on what I’m hearing is that you are saying that, 10 years ago, it was expensive to focus on clean energy, green, etc., where the cost to provide that has come down significantly. From an economic perspective, it can be a great investment as well.

Sarah: Exactly.

Patti: From your perspective, when you think about your clients because I know Schroders has such an influence not only here in the US but globally.

What I’ve understood is that Europe, for example, they almost don’t even categorize things as ESG anymore because they believe that every company should be focusing on that. Is that an accurate statement?

Sarah: Yes. I would say that in terms of Europe, or at least in terms of Northern Europe, ESG has become a hygiene factor. What do I mean by that is that it’s something that everybody is doing.

It is part of the entire investment value chain from the corporates to the investors to the end clients to plan participants. It is something that they’re clearly paying attention to.

Some of that is driven by, historically, Northern Europe, particularly the Nordics being a lead in the field of sustainable investing. Other bits of that is being driven by EU’s sustainable finance policy, where the EU has come out and not only put their flag in the ground to be the leader from a policy perspective around sustainable investing globally.

They’ve also developed a taxonomy that is actively looking to drive capital away from “brown or dirty industry” into green industry. They are trying to not only influence policy but also influence how capital is being driven. It’s not just the EU. We’re seeing pockets of regulation pop up globally.

Interestingly, if you looked at what had occurred in the form of regulation in 2017, there were just over 100 bits of policy or regulation around sustainable investing.

By 2019, it had exploded to around 250 global policies or regulations around sustainable investing by governments. I would say most of them because we were in a bit of a different scenario here in the US. We’re very supportive around sustainable investing.

Just to touch on, something we were talking before the podcast, Patti, is that we’re continuing to see that grow. We’re particularly continuing to see that grow around climate, as we think about and as we hear continuations of carbon prices and how they’re going to be potentially implemented at global levels.

Patti: You know what Sarah? I think that is a great tee-up for our next podcast. What do you say you and I come back on and talk a little bit about – or maybe, a lot – our new leadership here in America and some pretty dramatic initiatives in President Biden’s first week of office.

I’d be interested in learning what you think about that and where you think that could drive the United States, as well as the rest of the world.

Thank you so much for joining me today, Sarah. This is phenomenal. I can’t tell you how amazing you are at these different topics. I would not doubt for a moment that you read that 662-page paper this morning before our podcast even started.

Thank you for doing your homework. I so look forward to bringing you back on because I’m interested in learning a little bit of what’s going on behind the scenes down in Washington. Thank you so much for joining us.

Sarah: Great. Thank you for having me.

Patti: By the way, thank you for joining us as well, all of you who continue to tune in week after week, month after month. Boy, the feedback that you’ve been giving us is phenomenal. I’m so grateful.

It’s because of your feedback that we get to bring on incredible people like Sarah to talk about issues that are important to all of you, so keep coming back.

Thank you so much for joining us. If you have any questions, go to our website, keyfinancialinc.com. Until next time, I’m Patti Brennan. I hope you guys have a great, healthy day.

Ep65: Top Issues Affecting America’s Economic Recovery

About This Episode

America is two months into a new year and one month into a new Presidency. Many ideas were proposed during the campaign and some have already been put in action. Patti and her Chief Investment Officer, Brad Everett, focus on three specific areas that will be instrumental in determining our nation’s economic recovery. The expediency of the COVID vaccine rollout plays a major role in a “return to normalcy”. It affects the unemployment rate, the need for additional stimulus and the survival of small businesses. From estate planning opportunities and tax saving strategies to inflation – Patti and Brad discuss the implications that all of these have on financial planning and the success of portfolio performance.


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 our Chief Investment Officer here at Key Financial. Thank you so much, Brad, for joining us again for the show.

Brad Everett: Hi, Patti. Thanks for having me.

Patti: Absolutely. This is going to be a really cool opportunity for you and I to say OK. We had a conversation a few months back, and we talked about what we thought was going to happen. Now we get to say what really did happen and be accountable to everybody listening and taking their time to listen to our show and, “OK, what do we think now going forward from here?” Right?

Brad: Yeah, exactly, right.

Patti: We’re going to talk about the themes that everybody has been talking about at nausea. We’re going to talk about COVID, we’ll talk about the election and the resolution of the election, and maybe a little bit about the Federal Reserve.

Most importantly, Brad, let’s focus on what does it really mean for everybody listening today, and what should they be thinking about, and what should listeners be thinking about?

Let’s start off COVID. I heard one person say that the only time, the only way that we’re going to get a true recovery is when everybody gets a shot in the arm. That really comes down to the vaccine.

Brad: This isn’t something we’ve talked about, is it?

Patti: No, not at all. Not at all. What has happened though, since the last time we talked is that the vaccine was a concept. We were hoping. Now we know we have it, and it has been released. It’s been clunky in terms of getting it into the arms of Americans. Yeah, it’s here.

Let’s translate that into what does this recovery really look like, and what does that mean for the market?

Brad: This seems like a race. You had the vaccines out. You know what it is. You know what to expect from it. It’s just the matter of “Can you get it out fast enough if you feel confident that it was going to be wide dissemination by the third quarter?” Just as an example.

Can the economy, can the Congress put together stimulus package that would keep us afloat till then and avoid any major damage until then?

Patti: Yeah, because that’s a really important point. Just because there’s a vaccine doesn’t mean that people aren’t still suffering. There are a lot of Americans, there are a lot of businesses that are still out of business. They are not back up and running. There are a lot of Americans who are still out of work.

That has important ramifications, not just for the next three months or even the next nine months, but longer term because companies are probably going to be making decisions that if we hadn’t had this, they may not have been in a position to have to make, or, perhaps, the opportunity to make.

Brad: Right.

Patti: We’ve talked about that. You and I were talking, and I talked about it a little bit with Liz Young previously, and this concept of hysteresis. Tell us what that really means.

Brad: I had heard the word before, but I knew it as a physics word, a word from science. I guess economists have taken it over at some point.

Patti: They steal everything, don’t they?

Brad: Yeah, it seems like it. I think what we’re trying to avoid with a stimulus is the idea of hysteresis. You don’t want the trough to be so low that you never recover. The world is entirely different when it does recover.

You can think of hysteresis as the idea of a dynamic of a paperclip rather than a rubber band. In most cases, something goes wrong in the economy, everything snaps back like a rubber band. You stretch a rubber band, it comes back to the way it was fairly easily.

Patti: OK, Brad. Let’s visually do this. Here’s the rubber band.

Brad: You have a rubber band here?

Patti: I do. I absolutely I got my visuals. I got that. There’s a rubber band. It stretches, stretches, stretches, but when things calm down, it goes back to its original shape.

Brad: In most cases, that’s what happens any time there’s a temporary economic shock. That’s not uncommon. I think what you’re trying avoid here is a paperclip. If you bend a paperclip, it’s not going to go back in place.

Patti: OK, Vanna White, look out. Here I am. There’s the paperclip. I just bend it around and it stayed there. How do we compare that to the economy and the decisions that are being made?

Brad: Hysteresis is this idea that the effects of some kind of a shock will persist long after the causes of that shock are gone. The issues that we think are causing economic troubles now have since been rectified, but we still have problems that aren’t temporary anymore. They’ve become permanent.

I can give you a couple of examples. Massive unemployment several months ago, to an employer the decision to rehire an employee is a much different decision than retaining an employee. It’s much easier, once you’ve already laid somebody off, to make the decision now do we have to rehire that person? Can we replace them with technology?

Maybe we just don’t rehire anybody at all. Maybe we can get a smaller office if we don’t have this many employees. It becomes much harder to rehire someone once they’ve already been let go.

Another example, think of the work from home idea. Companies have been investing significant amounts of money in digital tools to make this possible for the last year. It’s become an accepted way of managing employees. Managers are comfortable now managing people that don’t come to the office. That’s fine.

Is it really a leap, then, to say, “Why do I need to hire this kid that lives in the middle of Westchester, when I can hire somebody overseas for a quarter of the price? There’s no difference to me. We’ve got the technology. That five‑mile difference makes no difference at all.”

Patti: It is interesting, because then it opens up a world of talent, no pun intended. It can be very interesting what this is going to look like. Be careful what we ask for. We might just get it.

Brad: Yeah, and I think that the more vague thing is, what is the effect of general pessimism long‑term? Does the pandemic change the way you think about and relate to the future? Is the world perceived to be too volatile? This pessimism, then, can become self‑fulfilling. Then, demand changes forever.

Patti: I think that is one of the biggest reasons why the Federal Reserve and the Treasury were so aggressive. They were worried about that, because it does become a self‑fulfilling prophecy. People stop spending. They have this money in the bank.

I don’t know about you, but I have a certain comfort level with a certain amount of money in the bank. When we weren’t doing anything during COVID, that balance grew. I’m comfortable with this new balance.

Something you said was also fascinating as it relates to that paperclip idea. I think about movie theaters, for example. We stopped going to movie theaters. What impact is that going to have? Is that more of a paperclip type of outcome? Are people ever going to go back to movie theaters, since we all have Netflix and Disney+ and these other alternatives, which are more convenient?

Brad: I think, if 12 months ago, you had the foresight to invest in a nice television and surround sound system, maybe you’d never go back to the movies again. It’s that decisions over millions and millions of consumers that dictate where the economy heads.

Patti: Let’s take this one step further. The next issue is the election. We now have resolution. It turned out a little bit different than I think you and I thought it might, in terms of a divided government with the Senate. It’s not necessarily as people might think. It wasn’t this big blue wave, for example.

Brad: No. I actually heard the term “a blue ripple.” It was a blue ripple.

Patti: Right, so it’s more of a ripple. What that really means is that, granted, there may be…I wouldn’t even say a majority of Democrats in public service, in the office, that can vote on certain things. There’s a slight advantage. It’s just slight.

To your point earlier, we were talking about this, and you brought up the concept of the Independents. There’s two Independents, right?

Brad: Yeah, I think so. The way they count that, to say that it’s 50 to 50 is based on the idea of the caucus. It’s actually 50 Republicans, 48 Democrats, and two Independents. Those Independents just happen to caucus with the Democrats. That’s a very informal organization.

That doesn’t bind them to anything at all. It just says, “60 percent of the time, we’re going to be thinking of the same kinds of things, so let’s spend more time together thinking about these.” They’re just informal meeting groups where they talk about common interests. “What are we trying to accomplish? How are we going to do it?”

It’s really 50 to 48 to 2, not 50 to 50, I think.

Patti: That is very different. I know one of those Independents, they really are independent. They are independent thinkers. That’s why they are registered that way. To think that there’s going to be massive legislation that’s going to change capitalism, as we know, is probably not realistic.

Brad: Absolutely. I’ve heard that rule of thumb that if you had 60, 60 is the number where you can force through whatever you want. Anything shy of that, you’re really, really nitpicking votes one way or another. You get one Democrat that doesn’t agree with one part of the language and your bill doesn’t go through anymore. It’s that simple.

Patti: We were talking about Angus King from Maine. He’s one of the independents. He was on “60 Minutes” this weekend. I just found him to be so interesting to listen to, ironically, because he was talking about listening. Of course, he was talking about the January 6th event. His point was that we can never condone that behavior.

At the same point, we have to understand that there’s a lot of people in America who have strong feelings about certain things. It’s important that no matter where we are, we have to engage more in this concept – He used the term that I loved – eloquent listening.

To really take the time to understand why they felt, not necessarily them but people, why they feel so strongly about something, that’s the role of our politicians. Together, they listen to the people in their community and people in their state. They go and do that brainstorming together and really talk it through, because it seems to me that the issues that are out there are really complicated.

I will tell you, I’m pretty well read, I’m pretty smart, what have you, but I really don’t understand everything. The fact that Jeff Bezos from Amazon, Jamie Dimon from JPMorgan, and Warren Buffett from Berkshire, all got together three years ago to solve this healthcare issue.

They’re going to reduce the cost for healthcare. They put together this company. Within three years, it has disbanded. They couldn’t figure it out. It just tells me that these things are a lot more complicated.

To really understand that going in, and we all may have our opinions, I don’t know, I’ve always gone into these things with a lot of humility and understanding that I really may not know everything about a particular issue. I have feelings, but I may not know absolutely everything that we need to consider.

Brad: It almost seems like his take on the whole thing was to get away from this idea that politics is just a zero‑sum game. You’ve got to believe that there’s more than two types of people in this country. There’s not just Republicans and Democrats. These issues are not just completely binary. It’s way more complicated.

He was just saying you have to listen. The reason that you came to the decisions you made are cultural or economic. They’re all these things. It’s like what you learned from your parents, the experiences you’ve had growing up. It can’t just be that simple as one side wins and the other side loses.

It’s like a step [indecipherable 13:45] in a horoscope. If you’re a Cancer, that means you fall in 1 of 12 personality types that dictate every action. Republicans and Democrats is way worse.

Patti: Exactly. That’s a great comparison. Being a Taurus, I can totally relate.

Brad: Defines every single thing you think and do. Your lucky numbers for the day.

Patti: Let’s translate that from a financial planning perspective because, again, we haven’t had a blue wave. It’s been more of a ripple. Maybe it’s a little bit more even, if you will. What people were really worried about is, “OK, what happens if there is this blue wave across the board? What does it mean from a tax perspective, a spending perspective?” On and on and on.

Brad: An election like this is fascinating to me, the brilliance of a democracy. This is the brilliance of a group of 300 million people making a decision rather than one because if you pull apart the pieces, it telegraphs what people really wanted. You learn from the election, one, we’re very much a 50/50 country. We’re very close. It’s not 60/40. It’s not 55/45. It’s 50/50.

You almost think there’s an exhaustion. The Republican Party wasn’t voted out of power. I don’t think of it as being the Republicans were voted out of power. A person that was a representative of that party was voted out of power.

Again, this is just me, but it’s almost like voters didn’t necessarily like that person as the representative. Maybe they didn’t dislike his policy so much, because he kept all the Republicans in Congress there. The Republicans gained seats in the House. Again, it’s still no overwhelming majority in the Senate.

A lot of those things will continue. It’s not like Biden was elected with such an overwhelming plurality that he can just do whatever he wants. You start with that. You start with this idea that there’s a lot of moderates in power right now.

There’s just no overwhelming majority. There’s probably a list of things that Biden will have an easier time getting through and a list of things that probably just aren’t likely based from what you heard during the campaign. These are things that he’s thrown out there as possibilities. Some of them will probably get through. Some of them won’t.

Patti: You’ve brought this idea of this power and the rising to power. What I’ve learned, more than anything, is the fact that, really, there are a lot of people who are very, very moderate. If I’ve heard anything, I’ve heard time and time again that the people who are “Republican” really liked his policies, Trump’s policies. They liked the impact that the policies had.

Everybody’s got their opinions and that kind of stuff. The impact of social media, let’s face it, it’s the people who are the most extreme, they’re the loudest people. They’re the ones that are all over social media. Moderates aren’t on social media. I’m not on social media. Are you on social media?

Brad: No. Not talking about politics, for sure.

Patti: No. Perhaps this perception that there’s this real wave of extremism, yeah, it’s out there and we certainly saw evidence of that on January 6th, but it’s probably not the majority. It’s probably not the majority of the people that are representing all of us.

With that in mind, the hope would be is that they take that and really take the opportunity to do that brainstorming together, the debate, the pros and cons of any policies that they want to think about going forward. Those policies would include tax law.

Brad: That’s, again, something that’s more would affect what people who want to listen to us talk about financial planning topics.

Patti: We’re all about talking about the things that are going to affect the people that are going to want to listen to us.

Let’s get to the bottom line. What should people listening think about depending on their situation? Income taxes.

Brad: Again, we think through like what’s likely, what’s not likely. I don’t think it’s a terrible stretch to think that you could raise the highest marginal bracket, a percent or two. Maybe 39.6 was suggested. I don’t know that that’s farfetched or tough to pass.

Patti: Brad, just for the record, do we think that is going to cripple the economy?

Brad: No, I wouldn’t think so.

Patti: OK.

Brad: We’ve had marginal tax rates far higher than that and managed to plug along. People still want to invest and make money, believe it or not, even at higher tax rates than that.

Patti: I remember when Clinton was in office, the capital gains rate was 28 percent for everybody.

Brad: Yeah. People still…

Patti: People still invested, and the market, by the way, did really well. Basically, what I’m understanding with everything that we’ve read is that Biden’s proposal would target people earning over $400,000.

Brad: Yeah. It sounds like it’s really that’s the focus, just the very highest of income brackets.

Patti: The ordinary tax rate’s going to go up. What about capital gains?

Brad: That’s an interesting one. There’s been some talk about increasing the capital gains rate. I would probably put this under the list of things that’s not likely to happen would be actually removing the qualified status of dividends.

Again, I think businesses have shown that they can react to that. Before qualified dividends were a thing, they just didn’t pay very much in dividends.

Patti: In English, guys, what that means is that a dividend paid by a company is taxed at 15 percent. It is not included as ordinary income tax at a much higher rate.

Brad: Because it was already being taxed at the corporate level.

Patti: Yeah, and it’s double taxation because the company’s already paid taxes on that dividend, and you’re going to pay taxes on it as well? The answer is yes. They reduced the amount that you have to pay to 15 percent.

Brad: You’d probably find enough people that disagree with that idea. Corporate taxes, I don’t know that I’ve ever heard anybody say that a corporate tax of 21 percent is sustainable. If that changed to 25, everybody will be like, “Yeah,” probably figured that was happening.

Patti: When it was passed, everybody knew this is going to last as long as it can last. Hopefully, we’ll get re‑elected, and then we can figure it out from there.”

Brad: I guess I would probably defer to your expertise on this, but I think in terms of estate taxes and things like that, I mean…

Patti: Let’s talk about that. On the estate tax front, we already know that effective 2026, this wonderful credit exemption of $11.7 million per person is going away. It’s going to go. It will be cut in half.

That’s already low, folks. Nothing has to happen for that to happen, if you will. A family can leave $23 million, plus or minus, to the next generation, and there is no Federal estate tax. The access over that amount would be taxed at 40 percent.

What Biden was proposing was he wanted to take that $11.7 million down to $3.5 million. That is a dramatic difference. When we talk about your estate, we’re talking about everything, not just your portfolio. We’re talking about your home, your vacation home, the value of your life insurance.

If you have a business, a small business or a large business, that’s included in your taxable estate.

I just saw an article on someone who died recently. The IRS was coming back at the stay because they didn’t agree with the value of the business. They’re literally doubling the amount of the estate tax that the family has to pay, but the business is really an ongoing entity.

Where are they going to come up with that money?

All of a sudden, a fire sale happens, because they have to sell the business in order to pay the tax.

That’s the problem. That’s the issue that we have as it relates to this Federal estate tax.

It’s a liquidity issue. The thing that caused the problem, how are we going to solve it? You have to sell, and everybody knows you have to sell, so they’re not going to give tough dollar. No way. No way.

Well, the IRS might think it’s valuable. The market says, “Well, that’s fine, but we don’t agree. We’re going to give you $0.60 on the dollar.” Not enough.

Let’s say you get $0.60 on the dollar, Biden’s tax is going to be $0.45, so the family ends up with $0.15?

Brad: Yeah.

Patti: Pretty crazy. That happens with businesses, small and large, as well as farms. Farms really get hit hard within estate tax. There’s other entities, but that’s something to think about.

Most of the people who are listening today, you may not be a farmer. If you are, heads up. Be aware. Do something about it.

Brad: What’s involved in changing that? Would that be for whoever is President in 2026 to extend or change or restart…?

Patti: Congress will take it up before then. If it stayed the way it is, which I’m not sure it will, but if it stayed the way it is, it becomes law in 2026. They must take proactive action to extend it.

Brad: You’d need a little more planning. You guys can’t wait until December 2025 to figure this out.

Patti: Absolutely, and I think it’s important for those people who are listening that you also can’t wait until then. By the way, there’s some really cool things that you can do to lock in this $23 million. It’s one of these things, if you don’t use it, you’re going to lose it, so let’s use it.

That credit is available, yes, when you pass away, but it’s also available when you’re alive. I’m not going to get into the weeds today, but there’s things called spousal lifetime access trusts, for example.

If, by any stretch of the imagination – and there is a lot of imagination in this – if by the stretch of the imagination we were in the situation I could take $11.7 million and stick it into a trust for Ed, my husband. I’ve used up my credit exemption, because the end beneficiaries are going to be my four children, but it’s a spousal lifetime access trust.

Ed has access to the income and the principal, whatever he might need while he’s alive. Whatever’s left in that trust will go to the kids tax‑free, even if that exemption goes back down to $3.5 million. It’s a cool tool to, like I said earlier, use it before you lose it.

Brad: It’s based on the amount at the time, not what it grows to.

Patti: Which is even better, because guess what. If Ed can finally go on a budget, which is heresy to Ed Brennan. I’m not kidding there. He engages in retail therapy literally on a daily basis. That being said, I will be working for the rest of my life.

Now, all kidding aside, if he left that trust alone, 11.7, and if it grew at seven percent, seven percent, money doubles every 10 years. 11.7 becomes 23, becomes 45 or 50 million dollars. We have left, in this fantasy land that we’re talking about, [laughs] 50 million dollars to the kids, and there is no federal estate tax. Zippo. That’s pretty cool.

Now again, not for everybody. It may be overkill for most people, but there are tools out there that can be used. There’s caveats to this, strings attached. You’ve got to know what you’re getting into, but there’s five examples of other things that you can do to take advantage of the estate tax law that we have today.

It will be important for everybody to be aware of. You’d be surprised how quickly it can sneak up on someone. I’ll tell you, Brad, it’s one of those problems that you want to have. You kind of want to have this.

Brad: Yeah. Not the worst thing, I guess.

Patti: Exactly, and if you can be proactive about it and preserve it, that’s what we’re all about. If you want to preserve, grow, and use your assets, that’s the way to do it. The estate taxes – it’s a long explanation that could be vulnerable.

They’re also talking about removing this step‑up in cost basis. That’s an important thing to keep on the lookout for. It doesn’t matter how much money you have. If we lose that wonderful little loophole, everybody listening needs to be aware of that.

That’s got some important planning under current law, lots of great things to think about, because we still have it. If we lose it, again, very important considerations.

I know I’m being vague here, but we’re not going to give advice or tell people what to do. It’s all based on their situation and whether or not it’s even a problem for them. Let’s not solve a problem that doesn’t exist. Just keep aware of what they’re thinking and what they’re talking about.

Next topic – Federal Reserve.

Brad: Yeah. I think the Fed’s been doing the same thing they’ve been doing. I think they’ve made their plans known that they’re probably going to keep doing the same thing they’ve been doing.

Knowing their mandate, it’s funny. I don’t think the Fed’s so mysterious. They have two major goals. One of them is to keep inflation around two percent. As long as it’s below that…I think since 2012 it’s poked up above two twice. It’s consistently below that, so interest rates I would assume would stay low until that becomes a problem.

Patti: Yeah. They telegraph that – lower for longer. Jerome Powell has pretty much said, “We’re not even thinking about increasing interest rates.” That’s clear, and it has had a ripple effect or domino effect in different sectors, like real estate.

Brad: Yeah. Low-interest rates affect every kind of investment differently. Real estate’s an interesting one. Normally, in most cases, you would think that’s good for real estate. You can buy a lot more house if the interest rate’s three percent instead of seven, so that would cause values to go up.

Home ownership’s a lot different than commercial real estate. You have to consider what the property’s used for. If you’re talking about office space or retail space or malls and things like that, it’s hard to value real estate if you don’t know what the cash flows are going to be. There’ll probably be a little bit of a lag there before real estate becomes too appealing again.

Patti: We’re back to the rubber band and the paperclip thing again.

Brad: Yeah. We just don’t know. Office buildings could remain empty for a long time.

Patti: What other areas? We talk about the impact of the vaccine, and the market, and this concept of rear‑view mirror investing – growth, growth, growth. We were talking earlier. I thought it was incredible, your number, in terms of the difference in performance between growth and value. Why don’t you share that?

Brad: For the year of 2020, all you see is the S&P. You hear that number every night, but they don’t break it apart. The value portion of that, the half, was only up 2.8 percent. That’s largely because of dividends. I think the actual total return is 2.8. I think the dividend yield is probably 2.3 or 4. The growth, though, is up 38.5 percent. There’s a wide disparity there.

Patti: I cannot remember a time when there was such a wide gap between growth and value. It’s been that way for a lot of years. Last five years, growth has significantly out‑performed value year after year after year.

Brad: Depending on how you define it, I think it never has been this overvalued relative to value. Rob Arnott was on Bloomberg this morning, and he made the comment…Let me take a step back. Usually, the comparison we use is price‑to‑earnings. That, even by itself, only 11 percent of time has the disparity been as great as it is.

It’s already pretty far away from normal, but Rob Arnott said, if you use the comparison of price‑to‑book value, it’s the highest it’s ever been. Growth is now 12 times more valuable on a price‑to‑book basis than value.

Patti: When we say more valuable, what we’re talking about is the value of the companies that represent that index. Just because something has that as the value, it’s based on the price per share. The price per share can get out of whack. People’s opinions, in terms of what the value of that stock, tends to go further than anybody thinks it might, like a Tesla or an Amazon, an Apple, etc.

There’s usually the argument, “This time is different. Look at that company. We’re never going to go back. The paper clip is going to stay that way, and that company is just going to continue to make money hand over fist. That’s the future. That’s why that company needs to be at that value. In fact, we’re not even giving it fair value for the future, so I’m going to buy more of it.”

It becomes, again, another self‑fulfilling prophecy. It’s a momentum market. It goes up because it’s been going up, so it continues to grow.

In the meantime, you’ve got these other companies that are paying their dividends, making their money. They’re unloved companies, just because they’re not as sexy. They may not have that. Included in those are the banks, for example, and energy companies. We’re not going to stop using gasoline and oil. We’re not going to stop using the banks.

They got hit hard last year. They did not perform nearly as well until that magic moment, folks, in November, when Pfizer’s vaccine got approved and then Moderna’s. All of a sudden, it was like clockwork. It was like a dime. I don’t know that I would have thought that banks would have skyrocketed as a result of a vaccine, but they did.

When I say skyrocketed, their stocks started to grow. They got to the point, if you look from September to the end of the year, value out‑performed growth. A lot of people don’t know that, because we only look at from January to December.

Take a look from September 30th to the end of the year. Look at value and value companies, dividend‑paying companies, really good companies. Compare them to some of the companies that we’ve all been talking about – the Apples, the Amazons, the Googles, etc. You might be surprised.

Here’s a question. I don’t want to put words in your mouth, but you’re a CFA. You’ve got all of the letters after your name. You are a brilliant Chief Investment Officer. In all of the things that you know and have read and have learned, how different is that in terms of when you’re coming out of a recession?

We’re still in the recession. We know that the market is a leading indicator, so it’s forward‑looking. You look at the pockets of the market, and what tends to come out of a recession – businesses, companies, markets – what areas of the market tend to come out faster?

Brad: The only thing I really know is that I don’t know anything.

Patti: You and me both, which is why we’re probably effective, to be honest with you. We don’t assume that we know.

Brad: To answer your question, I think a lot of times out of a recession, value tends to come out of a recession pretty well. Small‑cap value has been a place that’s been beaten down for the last decade. Not beaten down, but relative to large‑cap growth, for example. That’s had a great year, and especially a great last six months.

There’s a couple things. Part of what makes these companies slingshot out of a recession is probably not the fact that it’s the end of a recession, but the fact that low-interest rates tend to be there when you’re coming out of a recession.

The thing that fueled the exit from a recession…Would we exit a recession at very high-interest rates and see the same thing? Probably not, but I think a lot of the companies that’s slingshot out of recessions are companies that you’d expect to do well anytime rates are very low.

Patti: That’s a really good point. When rates are really low, those companies are refinancing. Just like we’re financing our mortgages, they’re refinancing as well.

Small companies are nimbler. They are smaller. They see the impact of something like that faster. Their cash flows are benefiting, and quickly.

Brad: I tried to think of a distinction between a short‑duration asset and a long‑duration asset, so you think of a company like Johnson & Johnson. It’s not Netflix. They’re not innovative like Netflix is. They have a huge portfolio of products, many of which operate under patents.

To a large degree, you can predict their cash flows for a very long period of time. Netflix, I don’t know how anybody can do that. Google, I don’t know how you do that, but a company like Johnson & Johnson or Procter & Gamble who’s got a thousand products in your grocery store, you can predict their cash flows for long time.

A lot of analysts would use a discounted cash‑flow analysis to try to value those. Interest rates being low makes that stream of cash flows at the end much more valuable.

They get rewarded almost for having longer, less volatile, predictable income streams than a very high‑growth company that you would hope to make your return very soon because you have no idea what’s going to happen later.

Patti: This idea of the cash flows, we also want to keep in mind that the value of a company…The only way a company grows is if their profits grow, their revenue grows. It’s the growth of the cash flow that is also really important.

If, all of a sudden, you go from paying six percent interest down to three percent, you’ve instantly got growth of your cash flow. That’s really how to boil it down into simple things.

Brad, let’s wrap this up. In terms of where we see the opportunities, we’ve talked about COVID, light at the end of the tunnel.

Election, there has been resolution, may not be as much clarity in terms of what laws are going to change, the impact. The impact of spending, stimulus, things of that nature, but it’s probably likely we’re going to see a third stimulus. Is that safe to say?

Brad: Yeah, I think there’s effort behind that, for sure.

Patti: I think that everybody recognizes that we need to keep people afloat until we get that herd immunity. There are a lot of people who are not afloat right now. Yes, the $900 billion was a good band‑aid, but it probably wasn’t enough to get us to that third quarter. So, that is probable.

Brad: I think both parties agree that it’s something to do. It’s just the details.

Patti: Exactly. Then, we’ve got the Federal Reserve. We have a good feel for what the Fed’s going to do and the opportunities that that could present. I think that everybody listening today…I don’t like to “should” on people, but I would take this opportunity to recognize where we are today and this new environment that we now have.

It is very different than it was in October, so please take the opportunity from a financial planning perspective. Look at your tax situation. Look at your estate, your wills, your trusts. What is relevant in your personal situation?

Then, drill down to your portfolio and your personal cash flow. Things are different. Some of you may be fully‑employed and be doing great, and things are seamless. Some of you may not. What implication does that have in your future financial planning?

Then, really drilling down in terms of the asset allocation in the portfolio itself, do you have the asset allocation and the weightings in such a way that you’re comfortable in this new world, in this new environment?

Again, with the understanding that Brad nor I know for sure what’s going to happen in the future, my recommendation is to go out and be gardeners. You want something blooming all the time. Diversification is the only…We don’t have any free lunches, but it is an important concept that you really want to stick with.

Yes, there are going to be periods of time when your international funds or your small‑cap value funds, just like Brad was talking about, they are just sucking wind and not doing anything. You might be thinking, “Why in the world should I continue to hold onto this thing? It hasn’t done anything for five years.” Then, boom. The second half of 2020 happens, and it goes through the roof.

That’s why you want something blooming all the time. That math helps to accumulate your wealth, because you have something that’s doing well. Sometimes, you can’t – I mean, Brad, you’re the expert in this with your background – you want to something that’s not doing so hard, right?

Brad: It’d be nice if everything could go up all the time, but this is not practical. I think you can’t…I just think of it like a flow of funds for money to go into something and make that asset go up. It has to be coming from somewhere else.

It’s an impossible idea to think that everything is going to always go up, but it’s the way the market seem to work.

Patti: OK, folks, so here’s the deal. It’s January. On that big, on this New Year’s resolutions, and yet I do think it’s a great opportunity for you to take a look at what you’ve been doing, get rid of that rear‑view mirror, and say, “Where do I want to be a year from now, five years from now, and long into the future?”

Try to make the best decisions for you and your family. That’s the key. Chances are there’re going to be different decisions than what you’ve done in the past.

Brad, thank you so much for joining me. It’s always fun doing this with you. You prepare, you read, you’re just amazing. Thank you so much for joining us. We really appreciate it.

Feel free to go to our website, keyfinancialinc.com. Write in some questions, let us know if you’d like to hear from us. We’re here to help you, we’re here to help your families.

Thank you so much for joining us today. I am Patti Brennan, and we’ll see you in a couple of weeks. Take care.

Ep64: The Next 900 Days: A Conversation with Liz Young, BNY Mellon

About This Episode

In part two of a two-part series with Liz Young, CFA and Director of Market Strategy at BNY Mellon Investment Management, Patti questions what the next 900 days look like for the markets – both nationally and globally. Liz, a frequent CNBC Contributor, shares her economic outlook and reveals some important principles investors should be considering. As the strength of the US dollar weakens, there are specific strategies that Patti and Liz discuss as paramount to portfolio success. There is also a new young class of investors that will be making an impact on the markets. Listen and learn how the political environment impacts their decisions as well as the regulations that could result. There will be shifts in leadership of companies, corporation communication and corporate spending. It’s time to pay attention and Patti explains why!


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 again today is Liz Young. Liz is a Director of Market Strategy for BNY Mellon. We are so lucky to have Liz with us today. If you haven’t listened to the prior podcast, turn this off right away. Listen to the podcast that we just released so that you can get a feel for how amazing she is and how bright she is and what she thinks in terms of what to expect the first 90 days of this year.

Then today, what we’re going to cover is, what do we expect for the next 900 days? Liz, thank you so much for joining us.

Liz Young: Glad to be here again. I don’t get to be president on this one, though, do I?

Patti: As far as I’m concerned, you’re in. I think you’re amazing.

Liz: I think I just want the job for 90 days. I don’t think I want it for 900. Just a brief appearance in the White House is fine for me.

Patti: That’s all we really need, Liz. You can tee it up. Then, all the things that you talked about in the prior podcast, you’re going to fix everything. Then from there, the economy will take care of itself.

Liz: Right. Perfect.

Patti: We talked about short term versus long term. Now, let’s talk about something that is sometimes painful, and that is this concept of diversification. When we’re managing portfolios to make them work for a client’s financial plan, part of that involves diversifying their assets.

I will tell you, Liz. It’s been hard over the last five years because the S&P 500 has been the only game in town, or I should say the best game in town. Again, we are not rearview‑mirror investing. We understand that that is the way that it was, but let’s look forward together and think about, “Diversification is a principle that works over time, maybe not every time, but it does work over time.”

Looking forward to the next 90 days – and I’m going to interject a concept or a thought – especially as it relates to where we are with the dollar and currency. Especially also as it relates to international investing, which is, frankly, the area that hasn’t done nearly as well as the US stock market.

What do you think about the value of the dollar, the currency? What kind of an impact does that have for that part of a person’s portfolio?

Liz: Let’s take a step back and do a quick lesson on diversification. I realize that it’s been used as a term “deworsification” too with clients because there are asset classes that seem to work against them all the time, or maybe they act like a drag on the portfolio, or as you pointed out, the S&P 500 has outperformed everything else, why do I bother with anything other than the S&P 500?

First and foremost, diversification is the combination of a number of different asset classes, and the intention is that those asset classes do not behave like one another, which means when one is up, there’s going to be another that’s down.

That is exactly how it’s supposed to work. A lot of times when clients are using certain types of assets, and I’m thinking about things like alternatives or fixed income, and they’re looking at them and expecting them to perform well at the same time that their equity portfolio performs well, they end up disappointed.

What I would call that is user error. If you’re using certain parts of your portfolio to perform well in up, down and sideways markets, please let me know what parts of the portfolio can do that because [laughs] there’s not a lot of asset classes that can do everything.

Diversification is meant to have some cylinders hitting while other cylinders aren’t. That’s rule number one. To your point about the dollar and international investing, first, looking at the strength or weakness of the dollar is something that I like to usually compare to, we talk about the VIX index a lot, so the volatility index, as the fear index.

I actually think it’s the dollar that’s the fear index because the US dollar is looked at around the globe as the reserve currency, as the safe-haven currency, and any time there is global fear, you’re going to see strength in the dollar because there’s more appetite for the dollar, and there’s more appetite for liquidity in the dollar.

As the dollar has weakened over the last six months, that’s much more an indication of fear subsiding around the globe than it is of anything else. You could argue that there’s some headwinds on the dollar, things like the trade deficit, the budget deficit in the US.

Yes, that’s true, but that’s more of a longer-term force and something that I would call a strategic force, not a tactical short term force that’s going to cause a three‑to‑six month pull back. Looking at the weakness that has already happened in the dollar, into 2021 we do expect it to either stay in that weak range, I would say at best, stay in that weak range if not get weaker.

Especially with a blue wave in Washington. As the dollar weakens, and as it’s already weakened, what that does is it creates a tailwind for international investing, and specifically for European equities and Asian emerging markets. That’s both debt and equity.

When you look at emerging markets and Europe, they’re actually very intertwined. The European consumer buys a lot of stuff from emerging markets. As that European consumer comes back in this global recovery, emerging markets benefit from that.

Then you have to think about the entire supply chain, all the stuff that European consumers buy from emerging markets have to be moved from emerging markets back to Europe. You’re going to have trucks. You’re going to have trains. You’re going to have planes that carry everything. That’s the transportation sector.

There’s all sorts of opportunities wrapped up into that theme, and the weakness of the dollar just further accentuates the attractiveness of international investing. The fact that the S&P has done so well makes the valuations on the S&P a little bit less attractive as compared to European equities and emerging market equities.

Patti: That’s really interesting. Let’s go back to the weakening of the dollar. How weak is weak? How much did it decline, and was that relative…was that a lot? Relative to other periods?

Liz: You wouldn’t expect something like the US dollar to have a ton of volatility in it because it’s the US dollar. We’re talking about the most influential and important currency around the globe, and many things are denominated in dollars.

Many global commodities are denominated in dollars. Obviously, the circulation of dollars is influential in all central bank operations. You wouldn’t expect it to have big moves, but I believe over 2020, it fell somewhere between 11 and 14 percent. I’m not sure what the exact number was at the end of the year.

That is a pretty big move, but you also have to remember that it rose a lot because of all the fear that happened in the beginning of the year. When you saw what happened in March, the dollar saw a lot of strength because that pandemic was globally reaching.

It wasn’t something where if we look back on the financial crisis, that began in the US. We started it, right? Then the rest of the world, unfortunately, caught it. This was something that was a global pandemic that hit us all. It was a completely exogenous shock, meaning it wasn’t due to excessive risk-taking in financial markets.

It wasn’t due to one particular region doing something wrong economically. It was completely exogenous, external, out of our control. Had nothing to do with the economy or the markets, but absolutely affected all economies and markets and actually almost exactly the same time, maybe within 30 days depending on the spread but almost exactly the same time.

That was global fear that took hold. When global fear takes hold, there’s really only asset that everybody’s going to want, and that’s the dollar. There was a ton of strength, and then as that fear let air out of the balloon and everybody took a step back, Armageddon wasn’t coming, maybe a depression wasn’t coming. Then you started to see a falloff in the dollar, but that’s not a bad thing.

I think that’s one of the things that I want people to remember, that a weaker dollar is not necessarily a bad thing for the US economy.

Patti: Very interesting, and really an important point also. When we look at the value of the dollar, we think about international investing. One of the other things that I’ve heard is that with this kind of stimulus, with this much money sloshing around, the value of our currency can also go down with that. Is that an accurate statement?

Liz: Yes, because when you think about all the money that’s sloshing around, so what we’ve done is we effectively put more dollars into circulation. The dollar that you’re holding in your hand, and there’s a stat.

I don’t want to quote it exactly because I’m not exactly sure what it is. I want to say it’s something like 70 or 80 percent of the dollars in circulation have been put into circulation in the last, I don’t know, 10 to 15 years or something.

As we print more and more dollars, the one that you’re holding in your hand becomes less valuable because there’s so many more out there. Then you’ve got basically what’s more money chasing the same amount of goods, which is deflationary by nature because all this kind of money flying around and everything that you had before is just worthless because there’s so much abundance of money.

What that does to the value of the dollar, obviously, is puts pressure on it. What happened in this pandemic in particular is that you’ve competing forces. Sometimes one force wins even if that doesn’t make economic sense.

The force that won that was driving strength in the dollar was fear as I mentioned before. As we move forward and as the economy gets healthier, what you might see is that all that spending and all that printing is actually putting pressure on the value of the dollar, which…

This is a completely separate conversation, but something that’s driving that cryptocurrency trade because people are looking at crypto and saying, “Is that a better store value than the US dollar now given the fact that we’ve just printed endless amounts of dollars?”

It’s going to change the way we think about what is currency, what is the strength of currency, what are the stores of value other than currency in this kind of strange, constant policy‑support environment.

Patti: It is so interesting that you bring up the competing forces. As the fear begins to decline, as people get more and more comfortable with that, is it safe to say that there’s some pent up demand and that we could go hog wild with all these extra dollars that we all have?

We know that the savings rate in the US broke a record last year. I think right now it’s about 13 percent, which is historically very, very high. We’ve got lots of money and savings, what happens when we are all back traveling and doing the things that we were doing pre‑COVID.

What could happen then? Is there an unintended consequence or a potential consequence that people need to be aware of?

Liz: Yes. First and foremost, I think it’s important to point out that we don’t all have a lot of money sitting around. This crisis has affected different levels of economic wealth in many, many different ways.

There is a large subset of the population and the economy that’s suffering quite a bit, and is not liquid and is still really pinching pennies. Then we’ve got food banks with the highest demand they’ve ever had.

There is definitely a part of the economy that continues to need that support.

Patti: Liz, can I just…

Liz: On the other end of it…

Patti: …can I just say one thing to you?

Liz: Sure.

Patti: This is why you should be president, because that was such a wonderful acknowledgment of what we hear in the media, what we hear and we read. I’m reading it too. Savings are going through the roof, etc., but, you’re absolutely right.

There are a lot of people out there who are not, don’t have a lot of money in savings who are still struggling. I think it’s important to acknowledge that. It’s important to acknowledge we’re not out of the woods yet, and we are a nation that is there to support the most vulnerable among all of us. Thank you for bringing that up. I think that’s wonderful. Thank you for saying that.

Liz: Sure. That’s the part of the economy that benefits the most from that fiscal support. A $600 check may not mean a lot to somebody who makes a million dollars a year, right? You’re not going to get one anyway. A $600 check to a family that’s struggling and trying to make ends meet and feed people every single night of the week is a lot of money. We have to keep that in mind.

Of the haves, we talked about the have nots. Of the haves, the savings rate did get really, really high. Understandably so. Not just because of fear, but also because we just had nowhere to go and nowhere to spend it.

Patti: Sure.

Liz: Nothing was open, so what are you going to buy? There was a period of time where there literally was no activity happening at all. That savings rate has come down slightly since the earlier part of 2020, but it’s still elevated again partially because there wasn’t really anywhere to spend it, or there wasn’t as much opportunity to spend it.

We do expect that as the recovery drags on and continues through this, that you’ll see a reduction in that savings rate around the globe. It’s going to be this reboot in activity and this reboot in demand. That’s a wonderful thing. I think there are some people that are still underestimating how strong that reboot is going to be.

One of the things that I want people to keep in mind is that what it could cause is inflationary forces, but they hopefully are transient. What I mean by that is as demand picks up again and as that savings rate falls and people start spending, it may happen very, very quickly. It may happen in a huge burst or a couple big bursts of that level. It’s the supply…

Patti: Kind of like the way it happened in terms of the way that we all pulled back. That was a sudden stop in economic activity. We were in our homes. We couldn’t spend the money.

Liz: Right, exactly. As it restarts, there’s probably some seasonality effects, right? People travel more in summer than they do at other times of the year. Anyway, but what could happen is as that demand comes back, if the supply chain isn’t ready to meet the demand, you’re going to see little bursts of inflation.

You might see some readings on the inflationary metrics, things like CPI, PCE. Those are the ones that get reported. You might see some readings that are above what we’re used to. Granted, we are used to some very, very low numbers, but you might see some numbers that are higher than that.

It could cause jitters in risk markets every once in a while. I just want people to be ready for that. Not that it’s something that’s going to cause a recession. Not that it’s something that’s detrimental or going to derail the recovery, but it could cause some jitters because we’re not accustomed to seeing that.

It could also cause some volatility in the yield curve or the treasury yield levels. As the treasury curve moves around and tries to find the right spot, maybe the Fed controls it and controls the volatility to some degree. But as it moves around, that could affect risk markets as well.

I think it’s something to just be on the lookout for. I think if we’re prepared to see that, it won’t be as scary as when it happens.

Patti: That is so good. Again, we’re just creating some reasonable expectations. Hopefully it doesn’t happen, but if it does, it’s nothing that we need to freak out about. Regulators, everybody’s aware that that’s a possibility.

Let’s continue this theme of Americans and social responsibility. Let’s talk a little bit and let’s end today with this idea of the socially responsible investing. It’s really beginning to get some legs, isn’t it?

Liz: It certainly is. Anybody who hasn’t been paying attention to it should listen up.

Patti: Yup. OK, we’re all yours Liz Young.

Liz: One of the things that we have talked about on my team as a theme for the next one to three years is the idea of ESG. That’s environmental, social, and governance. Frankly, it’s something that the US is behind on.

I think we get caught up in our own politics on this way too much. It becomes a very political conversation in the US. Whereas if you’ll look at what happens in Europe, it’s not a political conversation. They just accept it as reality.

There’ve been regulations put in place in regions like Europe that require companies to abide by certain metrics and have to meet certain codes in order to stay in business and in order to remain open. I think that that trend probably comes to the US sooner than later.

What could happen in the early days of that is that there are some corporations that are going to have to spend in order to keep up with the ESG theme, and in order to keep up with regulations that could come on an ESG perspective.

Now, this is not just environmental, I think that’s the one that we’re used to talking about and thinking about things like clean energy, and will companies be required to not dirty the environment, of course, but there’s also this huge force of social that has taken the world by storm, unfortunately, kind of a violent storm last year.

The social piece of that, and the idea that even the NASDAQ exchange is looking at requiring companies to have one female or one person of color on their boards. There is a social aspect of this, too.

That’s going to require companies to shift the way they do business, shift the way their leadership looks, shift the way that they communicate, and some of it is going to require spending. It could put pressure on corporate profits that are most exposed or most vulnerable to that in the short‑term.

That being said, the reason why I said if people haven’t thought about it, haven’t accepted it as a reality, it’s time to listen up is because the next generation that’s coming in as investors, and as consumers, and as the ones that we need in order to keep this economy moving is millennials. They are a huge generation.

They care a lot more about ESG than the baby boomers did. This is a theme that from an investor appetite standpoint, they want companies that are ESG compliant, they want responsible companies that they feel good about, they also want to work for companies that are ESG compliant and that they feel good about.

We have to think about that going forward, and that’s beyond one to three years. That’s a decade down the road as well, but it’s a trend, it’s a theme, it’s a force that is here to stay, it’s not going anywhere, and as the millennials enter the economy in a big way, it’s just going to get stronger.

Patti: Your point about ESG in the US versus say Europe is really interesting. I also understand that in Europe and in many international countries, there is no such thing as an ESG fund, because every corporation, every entity out there, if they’re going to remain in business has to be ESG.

This concept of segregating a part of the portfolio so that it is ESG isn’t as important on the international side as it may be on the US side. Where, to your point, we’re just beginning to focus on this. What’s your thought about that?

Liz: There are a few firms that do focus on investing solely on an ESG standpoint, and there are funds that will call themselves that. I do think that your point about…It starting to be a part of the investment process that’s accepted both internationally and in the US is probably where the world is headed.

There’s different ways to do it, though, and I don’t want to get too far into the nitty‑gritty of how you investors, an active investor or what we call the buy‑side.

You could do it as an initial screen, where you won’t even consider companies that are not ESG compliant, or you could do it as a backend screen and make sure that the governance is in line that there is no big red flags. Those are two very different approaches.

In the US, if you look back historically, and I was a due diligence analyst when some of this was still popular to do. It used to be what we call a negative screen. We would say something was ESG or whatever people wanted to call it, it was a negative screen.

What that means is you take a basket of securities, and you remove the ones that are in the industries that you don’t like. At that time, a lot of it was driven by Catholic Diocese. They removed firearms, they removed contraception, they removed a bunch of other things that they didn’t agree with.

Nowadays, it’s more of a positive screen. When you look at ESG from a positive perspective, you’re going out and saying, “We want companies that are driving this clean energy revolution. We want car companies that are driving that revolution. We want solar companies. We want wind companies.”

It’s positive in the sense that you’re purposely picking companies, or picking funds, or picking management teams that align with the values that you want to align with, rather than taking a basket of securities that’s pre‑canned and plucking out the ones you don’t want.

It’s a totally different approach, and I think that it’s where the future goes.

Patti: It’s an excellent, excellent point, and we started talking in our podcast together about the next 900 days. I think you’ve laid the groundwork for even longer that as we begin to pay attention and understand here in the US that that really is the future, and the companies that kind of, “OK, listen up, buck up,” it is time for you to pay attention to this as a corporation.

It is those companies that will be embraced by, again, millennials and people who may not be a millennial, but the general public, because they understand and we understand that that stuff really matters. Those corporations that can really gear their future with that as a core value within the company, hopefully, their business is going to prosper even more because of it.

Liz: That’s absolutely true, and prosper from different directions. As I mentioned before, it’s not just from an investment perspective, it’s where do people want to work, and where is your labor force going to come from? What’s your opportunity for gaining talent, retaining talent? What about your consumer base?

Do people want to buy your products? Not just do they want to buy your stuff, do they want to buy your stuff off the shelves, because it makes them feel good? Do they want to get their paychecks for you? Companies have to think about it on a lot of different levels.

Patti: Wonderful stuff, Liz. Thank you so much. You have been amazing over this podcast as well as the prior one. I just love your perspective. You’re very real. You understand where people are today and what they’re worried about.

The things that we’re all worried about are very real, so we need to listen and pay attention to that. What I also love about your approach is you’re very forward‑looking. Again, not just 90 days or even 900 days, but 5 and 10 years from now.

How is our nation? How is our market? How our companies…How’s the world being shaped, and by what? Liz Young, what a privilege it has been to have you as our guest today. You’re the market strategist for Bank of New York Mellon. My goodness, how lucky are they to have you.

Liz: Thank you.

Patti: So are we, by the way, so are we. This was a big deal. Thank you so much for joining me today. For all of you who are also listening, thank you for your time. Your time is valuable. Your feedback has been amazing for these podcasts. We want to keep it real and fresh.

I appreciate you taking the time to listen to us today. Again, as always, any questions? Go to our website, keyfinancialinc.com. Let us know how we can help you. Whether it be on future podcasts or for you and your family, we are in the business of being stewards of people’s wealth. That’s what we’re all about.

I think that these insights can help us to do that even better. Thank you so much. I’m Patti Brennan. We’ll talk to you again in the next podcast. Take care now.

Ep63: Liz Young from BNY Mellon Joins Patti – The First 90 Days of 2021

About This Episode

As we begin the first year in a new decade, investors and economists alike are busy with their forecasts. Patti recently had the pleasure of sitting with Liz Young, CFA and Director of Market Strategy at BNY Mellon Investment Management. Liz, a frequent CNBC Contributor, shares her economic outlook for the next 90 days both nationally and globally. In the first of two recorded episodes with Liz, Patti asks what investors should be focused on in the short-term. They identify the key trends to look for in a recovery as well as caution what industries will still struggle. This may be the episode to pay attention to if you are an investor that might have pulled back a bit in 2020 with all the uncertainty of the markets and the election.


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 Liz Young. I’m so excited to have Liz with us today. She’s the director of market strategy for BNY Mellon. Guys, we are so lucky to have Liz Young, you have no idea. This woman is all over the place. Everybody wants her on their show as their guest, and we get to have her today. Liz, welcome to the show.

Liz Young: Thank you. What an intro. I’m so excited to be here.

Patti: We’re excited to have you on. Thank you so much. Folks, here’s the way that I’d like to set this up. I’d like to break this up into short-term outlook as well as long term. Now, Liz, and I always talk. Liz, I don’t want to put words in your mouth.

We always talk about you got to think long-term, you got to think long term. Let’s face it, people don’t live in the long-term, especially given the media, the hype, and the 24/7 cable news networks. We’re getting inundated with things that we’re supposed to be thinking about. Let’s talk about the next 90 days. Liz, I’m going to put you on the spot, if it’s OK with you.

If you were president, President Liz Young, you’re going to make history today, what would you be doing for the next 90 days, for the first 90 days? Then we will segue into OK, let’s talk about the next 900 days. How’s that sound?

Liz: Sounds good to me.

Patti: Terrific. Given that we’ve had a tumultuous year. I can’t even say the word. It’s so bad.

So bad. Given what we’ve experienced and where we are today, what would you do if you were president? We can talk about policy. I’d actually be interested to learn, given your background –you’re amazing in terms of your background and what you know– how important policy is going to be as it relates to our clients and their money.

Given that backdrop, given COVID, the election, the outcome, possibility of increased taxes, etc, anything special from your perspective? I’m going to throw a couple more, debt, deficits, etc. Anything special that you’re optimistic about, concerned about, etc? What do you think over the next 90 days, in terms of what we could expect?

Liz: Sure. You made a great point to kick this off, that although we love to focus on the long term, and you hear a lot of investment pundits talk about long term investing, and your horizon is longer than 90 days. That’s all true. That’s all absolutely what I would preach as well. The reality of it is that clients look at their statements on a monthly, quarterly, and annual basis.

It’s not realistic to tell people that over the next market cycle, this is what you should think about, and try not to focus on the short term. It’s almost impossible today to not focus a little bit on the short term, or at least be swayed by it or battle those emotions on a daily basis.

That being said, thinking about if I were president, which is a thought I’ve never been able to consider before.

Patti: I think it’s so much fun.

Liz: I appreciate this opportunity. If I were president and I were looking at the US economy as the biggest player around the globe, and knowing that when the US sneezes, the world catches a cold. Maybe that’s not a good analogy to use in the pandemic. Either way, we are watched by every single region.

We set policy from a Federal Reserve standpoint for the US, but we also have to keep in mind, and Jerome Powell knows this well, that as soon as the Fed does something, a lot of other central banks tend to follow. There’s a lot to take into account.

If I were president today, and I was looking at where we are in this recovery or rebound phase, one of the things that I think you have to keep in mind is that there are parts of the economy that yes, are doing pretty well, and there are parts of the economy that optimistically, if you look forward, even 90 days, six months, you could imagine that they’re going to be close to back to normal.

There’s a lot of things that will reignite and have this flurry of activity as we get the vaccine deployed and as we get natural herd immunity that eventually comes over the course of the next few months. There are parts of the economy and certain metrics that are certainly not back to normal and will be a drag. One of those is the labor market.

That’s something that is moving trend wise in the right direction, but jobless claims and some of the things that we worry about with sticky unemployed persons, that’s still a concern. That’s something that the next president needs to consider.

If I were that person, I would still be focusing in the near term on the stimulus to get the economy and the labor market to the other side of this when we can start to rely a little bit more on fundamentals. What I mean by that is the parts of the economy like small businesses, and the intertwined nature of that.

Small businesses employ 50% of the labor market. If we can keep small businesses alive and afloat, we can keep a lot of the labor market alive and afloat. If we can keep small businesses solvent, we can keep more consumers solvent. That’s what I would be looking at first and foremost.

Patti: That is a really, really insightful answer. 50 percent of employment is with small businesses. The key here, and part of what that CARES Act was intended to do, and it sounds like we need to continue to focus on that, is to enable those businesses to survive. They have to survive. Keep people employed, so that we can keep this concept of commerce continuing to occur in our nation.

Liz: You can’t underestimate the power of sentiment, too. Small businesses are the fabric of American society. It’s the foundation and the bedrock of the American dream, and the idea that you can create and do whatever you want to here.

If we lose that dream, and if we lose that vision and the ability to do that, or if we get overwhelmed by the risks of doing that, some of the sentiment around it starts to die. Investor sentiment is a powerful force.

Patti: Isn’t it Bank of New York Mellon that has coined this term? I’m going to mess it up, Liz. It’s histrionics or histrio-something. It’s this concept of when something happens, a crisis happens, and the sentiment gets so negative that the reaction is almost worse than the thing that occurred in the first place. It’s what we do when that happens, we pull back. It becomes this self-fulfilling prophecy. That’s the issue with sentiment.

Liz: It is. One of the things that investors have worried about, and self-included, was that sentiment got quite a bit extended in November and December of 2020. We had the election behind us, which the lead-up to that election was probably more agonizing than the election itself. The election was behind us.

We started to get positive vaccine news every single Monday for about four Mondays following. There was this exuberance and absolute elation in the market about, “Oh, my gosh, this isn’t going to be forever. We’re not going to be in this place forever.” We pulled a lot of that positive sentiment forward into November and December.

Then you run the risk of if the timing is that far off, where the sentiment in the market is overheated, but we’re not actually out of the woods yet, and we haven’t actually started vaccinating, or we’re not actually at a place where the economy can restart, we’re still in shutdown in a lot of places.

Then there is a risk that we have a pullback only related to sentiment, where sentiment has to right-size itself to get back in line with where we actually are today.

Patti: It’s an example of the reality not meeting the expectations, and everybody is like, “OK, this is never going to end,” and the markets react accordingly.

Liz: That being said, one of the most important things that investors have to remember is that the market doesn’t reflect what’s happening exactly in this moment. The market is always a forward-looking mechanism. It’s looking out about 6 to 12 months into the future, and trying to decide, “Are things going to be better or worse than they are today?”

What the market is expecting right now, or at least the stock market is expecting right now, is that things are going to be much better six months from now than they are today. That’s one of the reasons why it’s this age-old debate when you go through a recession and you come out of it. Are the markets disconnected from the economy? Yes, they always are.

The market is looking forward. The economic data we get, at least the majority of it, is looking backward at what happened last week, last month, last quarter. They’re always going to have a disconnect. It’s that at the end of 2020 into the beginning of 2021, they were so disconnected. The magnitude of that disconnect started to be a little bit nerve-wracking.

So far, we’ve avoided catastrophe. Hopefully, we can make it until early spring when we feel a lot better about vaccine deployment, herd immunity, and the prospect of reopening that it won’t be a huge issue.

Patti: Let’s take that concept of the market being a forward-looking mechanism. For those of our listeners who may have been very concerned again during 2020 with the election coming up, and they were extremely conservative, maybe all in cash. Based on what you’ve said, are they too late to the party? Is it too late for them to get invested? Has that already been baked into the market?

The second part of that question would be based on what did so well last year. We always talk about this rearview mirror investing. There were pockets of the market that did extremely well and other areas that did not do well. What do you think about that concept, also?

Liz: Sure. The first part of the question, are people too late? No. The answer is no. Categorically no. Are you too late on catching the 45 percent outperformance of Fang stocks? Yes. Are you too late to get back in the market and benefit from the economic recovery that should ensue, starting probably in the second quarter and accelerating into the middle of the year? No, of course not.

There’s plenty still that we can look forward to. What I would say, though, is as you’re entering the market, or re-entering the market, first and foremost, I say this all the time to our clients, you must be present to win. If you’re not in the market now, it’s time.

It’s time to make sure that you’re allocating to the parts of the market and the parts of the economy that you would expect to either go back to normal and maybe they were under-loved like you pointed out in 2020. If you expect them to go back to normal or get back to their pre COVID levels, then you want to make sure you have some exposure there. You can catch that on the upside.

The other side of that is what we saw towards the end of the year last year is that there was this big shift from the stay at home trade into the reopen trade. Some people might be wondering, “OK, but what does that even mean?” We use those terms as if everybody understands it.

The stay at home trade was the trade for things that kept us connected at home, kept us entertained at home, kept children educated at home. Basically kept us sane within our four walls. That was communications, that was technology, that was some of those education stocks.

It was things like streaming services. Everything that we did once it was Friday night and all we did was move from the office to the living room. It kept us occupied. As we move into a more realistic version of an economic restart, you should expect things that we call cyclical stocks or cyclical sectors to come back into the forefront.

Those are things like infrastructure, energy, financials, consumer discretionary, as the consumer starts to reignite. Coupling that with the expectation that now we have a blue wave in Washington, that there’s going to be infrastructure spending that continues to drive that forward. Industrials benefit from that, materials benefit from that.

I’m thinking things like big heavy machinery that build bridges and roads. In order to build a road, you need cement. In order to build a house, you need copper, you need lumber. All of those things and parts of the economy that should reignite even further as we go forward.

Patti: That is interesting, President Young.

This is very insightful overview of what we might expect in the next 90 days. Again, we’re talking from an economic and a market perspective. We all know that the President of the United States is going to focus on a lot of issues. Social unrest, social issues, things of that nature. We’re focused on the economy and the market.

I think that what I heard was focusing on the labor market. That’s the most important thing. We know that the COVID vaccine is being rolled out. It was clunky initially. I think that that’s probably going to get figured out.

Hopefully, maybe not in 90 days, but certainly in the next six to nine months, we’re going to get to that point of herd immunity. For people who may not have been present, may not have been fully invested, it isn’t too late.

A thoughtful approach to what you’re looking for long term in the next 90 days would be a good idea. Is that basically what you’re saying?

Liz: Yeah. It’s almost as if you keep one eye open when you’re sleeping. Make sure that you’ve got your ear to the ground and you’re not oblivious to what’s happening on a daily basis. You’re also not letting it sway everything that you do and becoming too short term.

What happens when you become too short term as an investor is you try to chase trends, you try to call inflection points, and you start trying to time the market. I can say, if anybody had figured out how to time the market by now, most of us wouldn’t be employed in these professions.

Nobody’s good at it. Nobody is perfect at timing the market. Professional investors, non-professional investors, newbies, seasoned investors. It doesn’t matter who you are, it doesn’t matter how you were trained, nobody can perfectly time the market. There’s really no sense in trying.

What you have to focus on is, what are the themes long term that you think are going to help investors are going to help the economy? What do you really believe in as an investor as well? Don’t take your own personal opinion out of it.

There’s things that I would invest in because they mean something personal to me or they’re something that I use in my daily life. Maybe my mom wouldn’t invest in the same thing. That’s OK.

Patti: I love that last part. It’s all a whole different theme of socially responsible investing. That’s important to a lot of people. Let’s do this. I think we’ve got a good game plan for the next 90 days, thanks to President Liz Young.

Thanks to all of you. Join us for our next podcast, because Liz is going to stay with us. In that podcast, we’re going to focus on the next 900 days. Thank you so much for listening. Liz Young, thank you for joining me for this wonderful, wonderful overview.

Feel free to go to our website. If you have any questions, we’re happy to help. I want to make sure that these podcasts are informative and helpful to you. Go to the website. Let us know if there’s anything else that you’d like to learn about. Until next time, I’m Patti Brennan. Thanks so much for joining us today.

Ep62: Why You Shouldn’t Budget!

About This Episode

Budgets, like diets, don’t often work! They are restrictive and not always designed to let you live your best life. Patti and her Chief Planning Officer, Eric Fuhrman, discuss some easy, less constrictive ways to save money and allocate it in a way that might help the listener reach their goals faster than ever imagined.


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

Joining me today is Eric Fuhrman. Eric, you and I are going to be talking about that wonderful subject of budgeting, which, as you well know, having been with me for so many years, I just cannot stand the word budgets.

Eric Fuhrman: I know. Budgets, I think you say, are like diets. They are something that nobody ever wants to get in to or even think about.

Patti: Yeah, it sounds constricting. It sounds like, “Oh gee, I’m not going to be able to do the things that I really want to do.” It’s this feeling of tightness and constriction, and that’s not living your best life.

That’s what we’re all about. How do you live your best life? And yet we also have to be realistic that, “Hey, let’s face it. You got to find a way to create cash flow, excess cash flow, to be able to save for the things that are really important to you.” To me, that’s what this financial planning is all about, financial navigation as we call it.

To really figure out, what’s important to you, what you need to do between now and then in order to accumulate the assets that you need to accomplish that specific objective and how can you allocate it in a way that might help you to get there faster than you ever thought possible? Right?

Eric: Right. Absolutely. I think what’s so interesting from our perspective, or our vantage point, is that we get to see the ways that people track money, and those that are out there right now listening to the podcast, you’ll probably find yourself falling into one of these buckets that we discuss.

Usually, when somebody comes in for a meeting to talk about their finances and their goals, usually there is a complete and total absence of a budget. There’s the best guess approach, and then, there’s the budget that somebody brings in, which is usually multiple tabs in an Excel spreadsheet with lots of pretty colors, and different things like that.

Patti: I love the color-coding. It is just classic.

Eric: Oh, yeah. You can tell that somebody spends and hours and hours of their time going over and tracking every little expense and detail in penny.

Patti: If that makes that person feel better if that gives them a sense of control and comfort, then by all means, that is wonderful. The objective here is not to scrutinize how much you’re spending, it is to be able to identify areas where we can increase the savings, right?

Eric: Yep, absolutely. I think the common thread that we see and those different examples of how you might be budgeting your household finances, is that what those budgets merely provide is detail, or lack thereof.

They provide information of where the money is going, but the most critical element is that they are usually not attached to any kind of goal that bears any kind of resemblance to where somebody should be tracking in terms of wanting to retire early or something like that.

There’s just no connection between the budget and a purposeful goal that is being followed on a regular basis.

Patti: How often do we find, Eric, that if somebody doesn’t have those objectives identified. Let’s say that there’s a liquidity event. Let’s say that somebody exercises options, or gets an inheritance, or what have you. It sits in the checking account.

Because they don’t have the disciplined approach, they don’t have that thing that they want to accomplish at a particular date in the future, a lot of times that money just gets blown. It gets used in other areas just because it’s there.

We had a situation last week where somebody had a significant amount of money that they had received a year and a half ago. It was literally six figures. Yet, by the time they came in, it was about $25,000 was left from it.

Eric: It’s a shame.

Patti: When I ask them what they did, “Well, it went here, it went there. We actually built a pool.” Things of that nature. That’s great if that enhances the quality of life for them today. The problem is, is that they have three children. They don’t have money saved for college.

Eric: Exactly right. I think the common thing here that we see between somebody that has a budget, and somebody that has a successful plan is that there is either a behavior that’s being followed, a savings behavior that has been part of how they’ve operated for a very long time, or there is very well-defined process that’s automated to capture that savings and invest it on a regular basis. It’s not just haphazard, in terms of how it’s set up.

Patti: Exactly. Let’s you and I decide that we’re going to do something right now. Let’s just stop using that B word. From now on, for the rest of this podcast, you and I are just going to talk about defining what your monthly needs are. It’s all about cash flow.

It is what it is. Ultimately, you’re going to decide how you want to spend your money. It’s OK as long as it’s OK. If you don’t want to save that money, is it OK that the kids are going to have to go out and borrow money for college? It’s fine as long you’re OK with it.

Is it OK that you’re going to have to work until you’re 75 years old? If you’re not able to save a portion of what you earn today, that’s the practical reality.

Eric: What’s so important about what you’re highlighting there is it’s all about trade-offs. The decision is not necessarily good or bad. It just involves a trade-off. What’s so important is having an understanding of the domino effect of what those trade-offs can mean for later in life. It’s important since we’re no longer going to be using the B word anymore in this podcast. I’m going to try my best not to say it.

Patti: It’s a hard habit to break.

Eric: It is.

Patti: Believe me, I’ve broken about 20 years ago because I personally do not follow one.

Eric: Absolutely, but I think what’s important again a lot of people focus on the granular details of doing the B, right? What’s more important is to think about the big picture things.

You have to be able to see the forest through the trees here. Those big picture things are things like housing. What decision did you make on housing? What decision are you making in terms of automobiles, meaning, how much do you spend on them and how often do you purchase them?

Oftentimes we hear these, in my opinion, these silly examples of not drinking Starbucks in a day and how much money you can save. Now Starbucks is not cheap. Three bucks for a cup of coffee is pretty expensive. It’s about getting the big things right.

If you get the big decisions right in terms of getting into a house that you can afford and provides a lot of slack on savings and being smart about how you buy cars over your lifetime, you can drink as much Starbucks as you want. That’s not going to make a difference. It’s about getting the big things right first.

Patti: Agreed. I think that for those of you who are listening today, I also think that it’s OK if especially you’re trying to teach these…give your children these tools because a lot of times the kids haven’t been exposed to these ideas.

For them, going to Starbucks every day is a big thing for them. That’s a big decision for them. To teach them about money and to teach them the concept of what we believe is saving money first and spending the rest.

If you identify what you need to do and how much you need to accumulate for these objectives and then you back into, “Well, gee in order to accomplish this, what do I need to save today?” Then you can just spend the rest. To teach your families, I think it’s just…I’m going to get on my soapbox here guys.

I just really believe that this is a concept that is not taught enough whether it be in high schools or in colleges. How many people Eric come into us? These are highly powered, really powerful executives. Doctors, professionals and they just haven’t been exposed to these concepts. It’s really cost them a lot in terms of their own financial security.

Eric: In terms of the opportunity because time is an asset that’s probably the most valuable asset that anybody on this Earth has. It’s making sure you’re optimizing that and getting it working for you.

Patti: There’s nothing worse than having someone come in – and this happens so often – and they…How many times have we heard, “Gee Patty, gee Eric, I wish we had met you 20 years ago.”

Eric: More often than you would believe. All done.

Patti: It’s just amazing because there’s that feeling of remorse or regret that, “Gee, if I had only known these simple ideas and these simple tools, just imagine where we’d be today.”

Eric: I want to go back to a point that you brought up earlier which is the concept of saving and paying yourself first. If we think about how our life operates, a lot of folks are used to a regular paycheck that comes in on a regular frequency.

The very first action, the very first thing you have control over in that process is saving. Not what you spend when that paycheck comes in you can make that decision saving first before you spend the money. That’s what’s so important is that’s where you can really make the most impact is right there at that point in time.

Patti: Eric and how many times have you and I run numbers for clients? Really bringing that concept home. I tell people all the time, “Good savings will be good investments every single time.”

Yes, we manage a billion dollars, yes we do a great job of it, but we are really…We can be even more impactful by showing people that just by accumulating the assets in the first place that will go a long way to making their lives so much better later in life.

Eric: You’re absolutely right. There’s often a lot of…People have probably heard the litany of examples about the powers of compound interest and how powerful it is but anybody has access to a spreadsheet wants to run those numbers. The power of compounding occurs in the very last few years of your savings when you’ve accumulated a significant base.

Unless you’ve done your part to accumulate that wealth and savor that period of time, that’s where the power of compounding really kicks in is in those last 10 to 15 years of retirement or as you would say – I’m going to steal one your terms here – as the red zone. That’s where the compounding really kicks in is at these points in time.

Patti: Folks imagine it this way, it’s a hockey stick. It doesn’t feel like much when you’re just starting out and it’s you’re saving a little bit, you’re saving a little bit. It’s $100 a month, becomes $400 a month, becomes $1,000 a month. Then you’re doing the 401(k). All of a sudden, it just explodes.

That’s what we’re talking about here. You want to focus on saving first and spending the rest. If you get the discipline down early in life, it’s terrific. Eric, is it too late if somebody’s listening to this podcast when they’re in their 50s?

Eric: It’s never too late. As long as you’re living and breathing, you always have an opportunity to get focused and start saving. Any kind of 10, 15-year, 20-year increment of time, you have to expect it.

Even if you’re in your 50s, there’s probably a very strong likelihood that you’ll be alive, at least, roughly 30 years from now, 35 years from now. You still have a lot of time to be able to make course corrections that will make a big difference.

Patti: You are probably in your peak earning years as well. For some of you, not me, because I still have young children, one in college, if you’re like a lot of people, the kids are educated, they’re out of the house, those cash flow needs have diminished.

Your excess cash flow or what might be leftover might be greater, and that’s important to keep in mind. I also think it’s important to understand what you want your life to look at in retirement. That’s where understanding the goal, in the first place, is important.

This is all very achievable. Anybody can do this. It’s just having that heart-to-heart talk to say, “What does our life look like? Are we going to be in this house? Are we going to be moving to a different location? How much cash flow do we actually need coming in per month when we are retired?”

Eric: Absolutely, right. This is a perfect segue into the goal formation and savings process that we’re going to talk about. You’re absolutely right. The mathematics here are not that difficult.

When you think about this and sit down, you have to plan that whenever that retirement period is going to be, you generally probably have to plan for a 20 to 30-year period of time that you’re going to be retired.

Knowing that then you can go back in, and reverse engineer, not only the retirement number that you need to target but what kind of savings rate is going to be needed in order to achieve that objective.

Patti: Here’s a simple fact, folks, that will help to bring this home for you. If you decide or if you choose that you’re going to spend a thousand dollars less per month in retirement, I got good news for you.

What that means is that you need $300,000 less accumulated by the time you retire just because you’ve made that proactive decision that, “Hey, you know what? We’re going to downsize. We probably can cut our expenses by a thousand dollars a month.”

Eric and I get to tell you, “Hey, you don’t need that extra $300,000 now because you made the choice that you’re going to be living in a different way.” Not budgeting. Not feeling that sense of lack.

You’re just choosing to use your money differently both in retirement and today because that reduces the stress that you have today on having to save as much as you possibly can. It’s quality of life. It’s living your best life today as well as in the future.

Eric: What you’re highlighting is an important consideration. It’s that glide path of how your expenses are going to change as you age. For example, the mortgage could be paid off, you could always make the decision to downsize.

You have four kids at home. I imagine the adjustment and expenditure will be different by the time the last one…

Patti: I’m hoping so. It’s working already, but you do have the boomerang kid that comes back and lives at home.

Eric: What about these?

Patti: Yes, it is…that’s a practical reality that we all have to keep in mind. It’s a navigating process. Things are going to happen. Kids are going to need maybe some help, or you might want to give them some help.

Wouldn’t it be wonderful if you’re in a position where you’ve made certain life choices, and you were able to set aside even more money, and it accumulated to even more than what you will need to accomplish your objectives?

It puts you in a position to be able to do things for the people that you love and get them to experience it, and you get to enjoy it along with them.

Eric: Exactly. What do you think about maybe going through a quick rudimentary process? Just to give people a guide to how you would go back in and say, “How much do I need to save? What’s important?”

Maybe just give them a couple of steps and say, “Here are the pertinent questions that you need to answer.” That will go a long way to helping you along this road to determine what you need to start saving to meet your goal.

Patti: Love it. Let’s go for it. It’s all about actionable steps that they can take. We can all make it relatable so that you can use this information.

Eric: The first thing is that life expectancy is getting longer for everybody. That’s been a long-established trend that’s been changing over time.

You have to understand if we’re thinking about a household, husband and wife, that there’s roughly about a 74 percent chance that one of you will still be alive at 85 years old, and roughly a 48 percent chance that one of the individuals will still be alive at 90.

When we’re thinking about how long do we have to plan for we’re thinking 20 to potentially upwards of 30 years based on the likelihood that at least one of the spouses will be alive that long.

Patti: Eric, this is a good segue to highlight another podcast that we just finished called, 8,000 days. Roughly speaking, people are going to be retired for 8,000 days. That’s a long period of time, and there are different seasons of that retirement. Let’s keep that in mind as well in terms of what cash flow might look like.

Eric: Absolutely. Then from that day, you also…there’s different people have different opinions on this but the factor in that there’s going to be some other non-portfolio related sources of income. Social Security would be a big one. Perhaps you’re lucky enough to still have a private pension that might help add in there.

When you think about these sources of income, you have to figure out what that will be part of your retirement income stream. What portion do you need to finance through private savings?

Patti: Exactly. It’s all about filling the gap. If based on these examples, we put together some examples of somebody who is living on or has an income of $100,000 per year, and then we’ve got another example, someone who is living on $250,000 a year. That is, today, you might make different decisions and different choices in retirement, but let’s just start with those two examples.

Eric: If you’re in a household that was basically making $100,000 a year…This is from a study called, The Guide to Retirement, from JP Morgan, which is a great study that you can go through. They estimate that if your household income was $100,000 a year, you need roughly 41 percent of that to be financed through private savings.

If you are in a higher income household of 250,000 a year, you’re going to need roughly 58 percent of that to basically replace your income through private savings.

Patti: That becomes a pretty big nut. Depending on where you are today, and how much you’ve accumulated so far, that can be, for some people, feel insurmountable.

You and I, you know me very well, Eric. There is always hope. There is always a solution. It’s just a matter of figuring out what we can tweak here and there to make all of these things realistic and achievable.

Eric: As long as you’re getting out of bed every day, you have an opportunity to change the course of the future.

Patti: Absolutely.

Eric: Going back to that example, a lot of people have heard about the four percent rule. Just keep in mind, this is a rule of thumb. There are lots of caveats to consider with this. If you think about the rule of four percent, basically what it means is this is what we consider to be, in a lot of cases, a safe withdrawal rate.

As long as you can live on four percent of your private capital that you’ve accumulated over your lifetime, it’s associated with a fairly high likelihood that you will not run out of money over a 25 to 30 year period of time.

Patti: Now again, Eric, let’s talk about what this is. First of all, I’m going to tell you that I have a bias against rules of thumb like this because every family is very different. Also, understand it’s four percent of the initial value of that working capital.

When you retire, you pretty much have whatever you’re going to have. Then it is just a matter of how that spends out for the rest of your life.

The four percent rule basically says if you’ve got a million dollars, you can take $40,000 a year increasing by inflation. There is a relatively low probability of running out of money over 25 years. There are tons of caveats that assumes a well-balanced portfolio, well-allocated, diversified, yada, yada, yada. It’s a general rule of thumb.

Many people, myself included, are much, much more comfortable with three percent, especially in this low-interest-rate environment. We’re not getting the rate of return on bonds that we did just 10 years ago.

Eric: Right. Well, that study was first basically unveiled, I think, in roughly the mid-’90s. It was based using bond returns from the ‘80s and ‘90s when interest rates were far higher than where they are today. That’s a shortcoming.

The other thing, too, is that it doesn’t consider the possibility of a long-term care event. If you’re in a household that doesn’t have long-term care insurance, for example, that could be something that could definitely make the four percent rule completely irrelevant.

Patti: Absolutely. Let’s talk about the income replacement or the rule of 25. I think that’s an interesting one for people. If you’re trying to do this on your own and you want to have a goal, you want to just have a number. The rule of 25 basically takes the income that you’re currently earning, and it does a factor of 25 against that.

For example, if you’re a $100,000 household, you’re going to need a million dollars by the time that you are retiring.

Eric: Retirement age, right.

Patti: If you have an income need or you want to replace $250,000, you’re going to need $3.6 million accumulated by the time you choose to retire. It gives you those goals and those numbers to work with your own financial planning, if you will.

Eric: Yeah, I mean, basically, the rule of 25 is just the inverse of the four percent rule. If you take 1 divided by 0.04, gives you 25. That’s the idea, is that, whatever that income need that you have to supplement that’s not covered by state pension or Social Security, whatever you solve that to be, simply multiply that by 25.

Then that gives you a good guideline for the kind of capital you’re going to need to accumulate.

Patti: Again, folks, those of you who are listening, remember these are rules of thumb and the caveats we said before. To me, someone earning $100,000 having a million dollars saved for retirement, that feels a little light to me. I’m going to be honest with you. Again, take these rules of thumb, add a couple hundred thousand dollars. You’ll probably be fine.

Eric: Yep. Well, hey, and we are all about being conservative here like Patti said. If you want to take a more conservative approach and say the three percent rule, then just multiply it by 33. Then that’s the factor you need to save for rather than 25.

Patti: Also, Eric, I think it’s really important to point out that people’s needs during retirement actually do change. We’re focused on retirement. We’re also focused on life in general. You’re not going to need exactly the same amount of money rising by the rate of inflation every single year for the rest of your life.

In the initial stages, you might want a little bit more coming in. Then you’ve traveled to the places you want to travel. Your cash flow needs will go down, and then they might go back up depending on health and things of that nature.

Eric: Right. Excellent.

Patti: Let’s go back to this concept of, “OK, fine. You’re talking about retirement. You’re talking about college and all those things. You don’t believe in the word budget.”

How do we get from here to there? What practical steps can we share with our listeners to help them accomplish the things? Where are they going to come up with the money?

Where are they going to come up with the cash flow, I should say, to be able to steer into savings and investments to accumulate $3.6 million? That’s a lot of money.

Eric: Yeah, it absolutely sure is. I guess you would start first with your employer retirement plan. Just think of it this way, if you’re getting, say, a 4 percent match in your employer retirement plan, and then you also put in 10 percent, you’ve got 14 percent right there. That’s you’re saving. That’s the first place you would start.

Ideally, you want to try and put in as much as you can to that retirement plan. Then really have a systematic process setup that can be linked directly through your payroll provider, or, maybe, through your bank account where you’re just simply taking out a certain amount of money, an automated process that coincides with whenever your payment is.

If your bi-weekly payroll, every two weeks, a certain amount of money is getting pulled out of that paycheck and put into an investment account.

Patti: Eric, I tell people all the time. Here’s the deal, if you really want to make this simple and actually work, automate your savings, pay your bills the old fashioned way. You’re going to be making choices as it relates to how your money is being allocated. If it’s, or if you’re doing automatic bill pay, it’s great. It saves you time, but you don’t really control it.

It’s not necessarily empowering you to make those decisions. It’s like, happening after the fact. If you can actually slow down that process, again, we’re not talking about budgeting per se, but just create an awareness of where the cash flows actually going.

Eric: Absolutely.

Patti: I think that, when you think about this whole thing, it doesn’t have to be crazy, complicated, or overwhelming. It’s just a matter of making good choices.

Eric: Yeah, absolutely. Like we said, it’s all about adopting the right behaviors. More importantly, a process to just safe on a regular basis.

Patti: There are for those of you who want to look at different ideas on ways to increase your savings, which might mean cutting down on your expenses, there’s a really neat site, or an article by Marion called, thebalance.com, Ways To Save Money Today.

She’s got different ideas in terms of 20 ways to save on food, 20 ways to save on your monthly bills, 20 ways to save on entertainment costs. We are not talking about micro-managing your day-to-day activities. Yet at the same point, if there’s something that could save $50 on a cable bill, then by all means, why not know about it?

The one that I think is really important that I just want to point out is this concept of retail therapy. I will tell you that time and time again, when people are going through different times, etc, that it’s not unusual to just go out to the mall and just engage in a little bit of retail therapy.

If you’re looking at where you can come up with that extra hundred dollars per month, this may not be for you who are listening, it might be more for your kids. When it comes to anything that’s over $100, wait 24 hours before you do it. If you’re stressed out or upset, just do not go to the mall. I mean, that’s just practical. Just don’t go there.

When you’re planning for those big purchases, really, talk about it. It’s fun to just banner about if you’re married with your spouse. Wouldn’t it be cool if, fill in the blank. What can we do together so that we can accomplish that?

Eric: Do you have any solutions for Amazon therapy? I don’t know about you, but boxes continually show up at my house. I don’t even know who’re these things or where they come from.

Patti: It is definitely, I mean, I’m bringing in the B word, that is a budget buster. If I ever heard one, it’s just too easy. It does, it definitely can interfere with people being able to set aside that money every month.

Eric: Well, I think in this day and age, with technology the way it is, retailers had made it so easy to make the purchases via your cell phone. Having, basically all your credit card information. Everything loaded and preloaded. You can just literally make it so easy to make a transaction on the phone.

That’s, definitely, something that’s going to be hard to manage if you want to meet your savings goals as well.

Patti: Here’s the idea, Eric, in terms of this Amazon issue. What I would say is, I would connect the debit card. I know debit cards are not theoretically as safe as credit cards.

There is nothing that is less safe than running out of money. Just for whatever that’s worth. Connected to the debit card. My point there is if we can apply that 50/30/20 rule.

What that means is, based on your net paycheck, reserve 50 percent of your net paycheck for essentials like housing and food, 30 percent for discretionary spending, and 20 percent for savings. everybody listening today, if you are not retired, should be setting aside 20 percent. I’m sorry, it’s tough information. It’s not easy for everybody.

As Eric said, we don’t have pensions anymore. It is incumbent on you to save this money for your own future. 20 percent is really what you’re probably going to have to set aside.

If you know that that’s the goal if you know what your next paycheck is, you know what that 20 percent is, you set that aside first. Your 401(k) would be one area, then your monthly, yank it out of your checking account would be the other area, whether you’re investing in mutual funds or ETFs, etc., and then you get to spend the rest.

50/30/20, you’re saving 20 percent of your income to the things that are most important to you.

Eric: You got it.

Patti: Let’s pull this together in terms of helping more listeners accomplish the things that are most important to them, to live their best life. The thing that you started out with, Eric, was so very important. If it makes you happy to track your set spending if it makes you happy doing the spreadsheets, terrific.

I find most people don’t like doing that. It feels punitive. Let’s go back and do the opposite way. Let’s figure out what your 20 percent is, choose where you’re going to be saving that money, and then you get to spend the rest. Keep it simple, right?

Eric: Absolutely. The most important thing you can do is that very first step, which is, when you get paid, that’s where you have to save the money. It has to happen there.

Patti: Second thing is identify what is important to you. Figure out your timeline. Come up with the number that you’re going to need to have at that point in time, and then you reverse engineer it. Figure out what you need to do today to accomplish that objective.

Again, it makes the savings part feel like you’re working towards something that you’ve identified as important. It is. It feels good. It’s really fun when the money really starts to add up, and you see the account balances. You say, “Oh my goodness, this is actually working,” because guess what, folks? It does. It does work.

Again, we’ve pulled it together. We’re not micromanaging. We’re figuring out how much you want to save. You’re doing it every month. You’re watching your money grow.

You’re accomplishing the things that are important to you.

Guess what? It’s not all about the future. By doing this, you are living your very best life today. If I can say, as a mother of four children, you’re also setting an amazing example for your family.

Eric: Absolutely.

Patti: For those of you who are interested in learning more about this, again, we are not talking the budget word. We are talking about cash flow. What are your cash flow needs today? What are they going to be in the future? What can you do to make all the things that you want to have happen in your life achievable?

It’s so incredibly empowering. It’s so wonderful to know that, if you just do A, B, and C, you’re pretty much there. All of a sudden, going to work takes on new meaning. It doesn’t feel like you’re slaving, etc., because you know you’re working towards something that you’ve identified as really important.

Again, that’s what gives people that sense of well being and happiness. Again, not just when you’re 65 or 85, etc., that’s not what it’s all about all the time.

Yes, it’s important. I would be remiss. I wouldn’t be doing my job if I didn’t put you in a position to accomplish those things. Let’s also make sure you’re doing the things that you want to do today as well. Have that fine balance.

If you want to learn more about how to do that from a practical perspective, go to our website. Give us a call. I’m happy to talk with anyone and give you these ideas that are much more personalized that apply to your particular situation.

Really, if you like what you heard today, and you want to share it with anybody, share it with those people that you also think might benefit. Share it with your financial advisor. I’m all about making everybody in America financially secure, financially confident.

If we can get even more advisors talking about these issues that really make the big difference, then we’re all going to be better. What do you think?

Eric, thank you so much for joining me today.

Eric: Thank you for having me, Patti. I look forward to the next one.

Patti: Very dry subject, I love doing these with you. You really pop it up for me. Thank you all for joining me. I am Patti Brennan, and I will see in the next episode. Have a great day.

Ep61: Hot Housing Market Tips & Trends

About This Episode

One of the big surprises in the last quarter of 2020 was the housing market boom! The unintended result of major metropolitan areas in lockdown and millions of Americans now working from home has been home sales that are off the charts. One of the biggest drivers in this uptick of renters leaving cities to become first-time homebuyers in the suburbs are millennials. No longer can a one-bedroom serve as both an office and a residence, and the amenities of living in a city in lockdown have long been taken away. Older generations are also seeing a unique opportunity to sell while the market is hot instead of waiting until retirement. In today’s episode, Patti sits down with the Main Line’s top realtor, Lone Spillard, of Compass Realty. They discuss the trends that are now happening in the real estate market as a result of the pandemic and the opportunities for home buyers and sellers alike. Thinking of buying or selling your home? Even if you’re not, this episode may change your mind!


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. For most people, their home, the real estate is the largest asset you own.

Today, we’re going to break this down. Real estate market is on a torrid pace. Things are flying off the shelves. What are the dos and don’ts when it comes to selling a home, purchasing a home? Are the old rules of thumb, location, location, location, get in a good school district? Do they still apply in this market?

Joining me today is Lone Spillard and Emily Fazzini, what many people refer to as the Dream Team. They are with the Lone Spillard team at compass and I can’t thank you both for joining me today. I know how busy you are. I know how in-demand you are. It means a lot that you’re here today to break down the market and tell us all, “What in the world we’re supposed to do?”

Lone Spillard: Good morning, and thank you for having us, Patti. Emily and I are both thrilled to be here. Yes, the market is indeed on absolute fire. I am going to let Emily introduce herself, and then we can get into it a little further.

Emily Fazzini: I am with Lone here at the Lone Spillard Team with Compass. I joined Lone two weeks before the pandemic started.

Patti: It’s so interesting because you guys have a unique combination. You’ve got the experience of Lone Spillard who has been in this market, knows it cold every home.

Then, Emily, you come in brand new. You’re a Millennial for those of you who are listening today, with the wonderful energy and experience and skills of a Millennial. Together, it’s a great combination.

First of all, how in the world did you ever meet?

Emily: That’s a great question. Lone was my parent’s realtor. When they started the search for their…They called it the last stop on the train home, which was really a home with a first floor, master, and a couple of other details, they really wanted.

Lone probably showed them over 75 houses. My mom said it passing to me on and off for a few years, “Yeah, I’m going out with our realtor, Lone…”

Patti: Let me stop you there, a few years.

Emily: Years.

Patti: OK, years. All right.

Emily: That shows you that Lone has the patience of a saint. I finally went to one of these mysterious showings with my mom. That was the first time I met Lone. About a year later, when I decided I was going to go into real estate, my mom connected the dots and said, “I’m going to put you in touch with Lone.” The rest was history.

Lone took me under her wing and brought me onto her team at Compass. I couldn’t be more grateful.

Patti: Excellent, it’s so funny, because literally when we were talking before the show, you said something to the effect of, “I thought my mom made this person up.”

Emily: I was convinced she didn’t exist. It was just, now being in the industry and seeing what type of client my mom was, I turn to Lone all the time. I’m like, “You were a saint.” I kid you not, she probably showed them close to 75 houses. The big joke is that they settled on new construction.

Patti: How many houses is typical when you’re showing? I heard at one point that 10 houses, that’s pretty much going to tell you what…

Lone: Patti, it depends on the education level of your given client. That’s what we do is, when we do speak to a client at first and instill some trust in them, we also find out what level they’re coming in at. How knowledgeable are they? We like to show them homes within their given parameters and put in some lucky cards in there as well.

If they’re looking to move fairly shortly, then yes, maybe 10 houses. Sometimes it’s the first house they look at, they fall in love with. Sometimes, yes, it is years, and sometimes it is 100 houses.

There’s never a set rule. You just know that whenever you show a house, you give it 100 percent. They see what they want to see. Then you educate them about the ups and downs of that given house.

Patti: That sounds good. Are there any trends that you’re seeing right now? I talked about location, real estate, the schools, things of that nature. We’re hearing just anecdotally that people are moving out of the city for example. Are you seeing that? Who are your typical buyers? What’s happening?

Lone: My typical buyers are referral buyer, and tends to be a little on the higher end. That being said, I never say no to anything. I love as much a new buyer. Emily’s concentration is the first time homebuyer.

As your question about moving or flocking in from the city, I wouldn’t say people are flocking in from the city as much as they are, perhaps in New York City. We are seeing some people move out because there are people that want greener pastures. They want more space. We’re definitely not seeing the flocking.

As to your question regarding trends, school districts are always going to be paramount. We’re also seeing that people pools are back in vogue again. Before they didn’t add much value to a house. Now, people are definitely looking at pools. They’re looking at more staycations, ways to stay at home to enjoy their home. They want more space.

They still want the open space. The trend is definitely shifting a little bit. Movie theaters downstairs in the basement, they’re back in vogue as well. Fire pits, you name it. Everything from gray walls, even that is shifting now to a more bluish color.

COVID has changed a lot of things when it comes to trends and homes. The foremost trend is probably a home that is all fixed up.

Patti: That was a question I was going to ask you too. Given the torrid pace of this market and how quickly things seem to be selling. You can correct me if I’m wrong on that. You look at a home, does it make any sense to put any money into your existing home, if it’s going to fly off the shelf anyway?

Lone: It depends on what your house looks like on the inside. If you’ve lived in that house for 20 years, and it was decorated 20 years ago, then absolutely. Even if it’s paint, new curtains or, removing things. We have to remember that we have a tendency to decorate our homes after our own tastes. We need to neutralize them.

When we put a house on the market, it goes from being a home to a product. It’s removal of a lot of personal items. I’ll let Emily speak to that as well.

Patti: You remove the pictures because the people who are walking in the house, you want them to be able to see themselves in the house. They don’t want to see you in the house. They want to see themselves. It’s amazing the psychology of this.

Do you guys still have boiling water with vanilla or that the potpourri go on? That is pretty wild.

Emily: That’s funny. I haven’t baked any chocolate chips at an open house before. Choc chip cookies on open house but I’ve heard that. To Lone’s point. It’s definitely a fine balance between depersonalizing but also making it feel lived in and homey enough that someone can envision themselves there.

Patti: Wow, that’s terrific. The fact that the pools are in. The fact that the staycation, that’s a fascinating change that the pandemic certainly has brought out. What’s also interesting, in looking at the demographic, who is buying these homes?

I was looking and in 2011 people who are in their 30s basically originated $62 billion worth of mortgages. In this quarter alone, that was $300 billion. This is a titanic that is shifting. The old idea of kids that are going to be in these studio apartments or in their parents’ basement, that is not going to happen. It is moving, isn’t it?

Emily: The statistics we are seeing out there with, people were scared that it was going to go into another housing crisis with COVID. There’s so much out there. The number one thing going against that theory is the strong demand from the Millennial home buying market.

COVID accelerated it, because a lot of Millennials did live in apartments and rent and cities. Then finally, they started relooking at everything. They started having to work from home, where working from home wasn’t as accepted pre-COVID as it is now.

People are living in their one-bedroom apartment with no office. They’re looking at their finances saying, “What can I afford now to make my space more livable?”

Patti: That’s a good point. Having a couple of my kids come back home. We’re all trying to work in the house. I’m like, “Kelly, wait a minute. I’ve got this Zoom call, you can’t be in this area.” She’s got to go to a different area. I’m ready to go to the bathroom and do Zooms. It’s just getting crazy with the number of kids and people in my house.

It’s also interesting with those 30 somethings. We have to think. They graduated from college. Typically, if they had student loans, it’s a 10-year pay off. Now, they’re in their 30s. They don’t have the student loan debt. Their cash flows gotten better.

What are they buying? Are they buying the starter home like we started with or what’s happening in that area?

Lone: The starter home certainly has changed, and so has the pockets, or the pocketbooks of the Millennial purchaser. We often find that there’s two incomes that are coming into it. It’s really gone from a starter home of 250 to…in Emily’s experience. She can speak to this as well.

It’s anywhere from over 500 to close to would you say $800,000 as well, Emily? There definitely is a shift in what they’re looking at, and how much they’re spending.

Patti: What they seem to be able to afford.

Lone: That’s what I mean, what they’re spending, absolutely. They want perfection. They want to walk into this home with gray walls. They want stainless steel. They want it all. They don’t want to do anything because they want to enjoy the outdoors. They want to get out on their bikes. They want to go hiking. They want to experience life.

Patti: They are the experiential generation where they don’t want to be stuck in the house. They’re not the do it yourselfers. They want it to be done. They need a place to live. They want to enjoy it. They want to feel good and go back to work and get on with life and go have fun. Have I described you, Emily?

Emily: I’m laughing because we are called the instant gratification generation. We are pretty much. There are some exceptions. For the most part, the trend right now is definitely move in ready.

Patti: We talked about this on the show. As much as technology has improved our lives, we’re busier than ever. I certainly think that with your generation, you are the tech generation. You use tech, you’ve got your Instagrams. It’s crazy, all the crap you guys use. Yet you don’t have time. You don’t want to be doing the house. You go out and you go do your thing.

Generally speaking, people are over that. Having a walk-in, having a home that’s got that curb appeal, and it’s already done. It’s appealing to me. How about you Lone, forget the generations, I know that’s what I want.

Lone: I’m one of those first-floor master people with low maintenance. I’m not a big cook either. I hear that, absolutely.

Patti: Housing’s going nuts, prices are going up. Let’s talk a little bit more about that. What are you seeing in your market? You guys are mainline, literally the Lone Spillard team, we move mainline. You know the market better than anybody that I know.

As a sidebar, I’ve worked with a lot of people. I’ve had the experience of working with this team. They helped a very dear client of mine, sell her home. It was a tough situation, very difficult, just emotionally for this person to sell her home. There was so much history there, so many memories.

I cannot believe the way that Lone and Emily were able to gently move this person in the direction that she needed to go. It was a difficult process. What is also so interesting is, this woman I talked to her a week ago, Lone, she told me that you’re still going out to lunch with her two years later.

For those who are listening, this woman is in a continuing care community. She’s not buying another home. Yet, you’re still going out to lunch with her. That said volumes to me about who you are as a person and how much you deeply care. It’s not BS. You are the real deal.

Lone: We like to take personal care of our clients. We get to know them. We become friends. In this woman’s situation, she happens to be a bridge player. We do a lot of bridge games online as well. A very dear friend of mine.

Patti: It’s amazing. I introduced you to her. Now, you’re closer with her than I am.

Although, if you’re listening to this, I’m still the BFF. It does say a lot about your approach. What I also think is the combination of the two of you, is really creating the experience that so many people were missing. That community feel and what you’re doing in terms of helping people, bring people up to speed with what’s going on in their neighborhoods.

Emily, tell me a little bit more about that. I know that’s your thing. You’ve taken that technology and your experience and reaching out to people, who may not even be looking for a home.

You’re reaching out and talking about, what’s happening in your neighborhood? What are some of the things to do? Here are the people that you might know? This is pretty cool stuff. Tell us more about that.

Emily: Totally. In my previous life, before real estate, I owned a small startup business, actually right here out of Westchester. We made snack bites. I got a peek into the small business community in the Greater Philadelphia area.

I realized how much it meant, even as a small business owner to have the support of people in the community. That was your ticket to making it, not big, but successful and not bigger than a hobby. You could live off of it. It could be your business, which is ultimately a small business owner’s dream, is to live off of what they do for day to day activity.

When I went into real estate, I realized that it really wasn’t that much different being an entrepreneur, in the sense that our day to day is, we control it. We are the owners of our business. This is a small business within our brokerage. I had a vision for us to be more community-focused, than the more traditional agent, marketing style of so person focused.

We wanted to put the focus back on our community, and highlight the amazing points of our community. Why we love where we live and things to do in our community that will ultimately add value to our consumers’ lives, rather than just selling them a piece of real estate or helping them buy this real estate.

Patti: When you build up the community, when you bring people in that sense of inclusion, it increases the value of real estate because everybody wants to live there. That is so interesting. How are you doing that specifically?

Emily: Lone and I have an Instagram page called We Move Main Line, where we highlight local businesses. We give a peek into what we do on a daily basis. Also, our personal Instagrams, Lone is @theloneh and mine is @emilyfazzini.

We have a newsletter sign up that goes out every Wednesday at 8:30. There we highlight local events in the Greater Philadelphia area from Friday to Sunday. It’s family-friendly activities, great date options, even with a best friend just to do something, even by yourself.

We give great recommendations for activities. Then we give some of our favorite real estate pics of the week. Then we highlight one local business and might not be a business you know about but we just love keeping our community in the know. That’s really how we built a little network of our followers.

Patti: Well, you know what, I am a follower and I get your newsletter every week. It’s awesome, because it does make you feel included. I feel like, it’s not a pitch either, what I appreciate and I have not said this to you, but I appreciate the fact that you’re just out there, trying to include everybody, tell everybody what’s going on.

Not everybody gets local papers anymore. If they get them, they’re probably not reading them. Like us. That’s great. By the way, if you’re ever looking to sell your home, we’re here to help. That’s all it is. It’s an afterthought.

Emily: We truly do care about our community. We’re community advocates. People ask about what sets us apart. Also, the fact that, I feel we’re an unconventional team. I love that about us.

We both bring such different pieces of value to the market, like Lone teaches me something new, every day, which I appreciate. I hope that I give a little bit back to her, even if it’s showing you how to copy and paste or use Instagram.

We add value in other ways.

Patti: When we’re done, can you please show that to me?

Emily: Yes, I will.

It’s a beautiful balance. I’ve had a lot of fun. I wanted to do things differently. I’ve always been that way. It’s slowly breaking the mold of what traditional real estate marketing is. Where a lot of people go wrong in marketing is they ask for trust. They ask for following, but they don’t give any value. I’m not talking about paid value. I’m talking about any value.

People are like, “I can’t believe you take the time to do a newsletter.” I’m like, “Well to me, I enjoy doing this first of all.” Second of all, you have to give value. You can’t ask for people’s trust and ask for it without giving them anything. It is free if you want to say that. I don’t look at it like that.

Patti: It’s so interesting. That’s why we do this podcast. We do this podcast, it’s free. We work hard to do these and educate and inform. We get a lot out of it because we learn a lot. I’ve learned so much from both of you today about the market, what’s going on, what to do, what not to do.

It’s funny, because one of the things we were talking about earlier was, is this a bubble? Is this going to be another real estate bubble? It forced me to ask that question. That’s why we do these podcasts.

I’m a big believer in the Walt Whitman school of thought. He basically said, “If you ever want to learn about something, write a book about it.” In my case, if I want to learn about something, I do a podcast on it. I wanted to learn about what’s going on with real estate, especially in our area. I brought the best team in the area to find out.

In doing that research, for those of you who are listing one of the things that I’m worried about, to be perfectly clear, I’m worried about the pace of increases. Lone, why don’t you go through that? It’s worth you guys hearing this. It’s amazing. We got to be on the lookout. In our area, you guys work from Wynnewood to Westchester?

Lone: Correct.

Patti: Let’s talk about the different markets and the change in prices.

Lone: I have some stats on the different counties that we deal with, which is Chester County, Delaware County and Montgomery County. Our active inventory, which means if nothing new came on the market today, this is how long it would take to sell every single house in Chester County. We have one and a half months worth of supply.

Patti: That’s short.

Lone: In Delaware County, it’s less. It’s 1.4 and Montgomery County, it’s 1.4 months as well. The price increases in Chester County from last year is 17 percent. The price increase in Delaware County is 10.3 percent and the price increase in Montgomery County is 14.4 percent.

Patti: I hear those increases, and it brings me back to the real estate bubble. That’s what was happening in the real estate bubble. When you told me that Lone, I thought, “Should I be you know, worried about this? We’ve got to be careful.” One of the things that led to the bubble was that anybody and everybody could get a house. They could qualify for a mortgage.

What I found interesting is that 72 percent of mortgage originations this quarter had a FICO score of 760 or greater. That’s a very big difference. I don’t know if you’ll agree with me, but between just the shift to people wanting more space bigger, maybe moving out of the city, certainly New York. I have a client who moved out of Manhattan and is living here now.

I see it also on anecdotal basis. Between that, the 30 somethings who are buying their first homes, very low mortgage rates, and the quality of the people who are buying homes, it feels this Titanic, this pent up demand that’s been there for 10 years has shifted. It doesn’t feel it’s going to be a bubble, because of the quality.

It just it feels like, I often tell people that real estate has the longest cycle of anything you can put money into. The stock market is typically a 5-year cycle, it goes up a lot one year, does pretty OK for three years, and then is down at one year. It’s a 5-year cycle.

Real estate, I tell people typically has a 10-year cycle, where it’s limping along for about 10 years, and all of a sudden, it is the only game in town. What are your thoughts on that?

Lone: With the given interest rates that are historically low, and you can speak more to that I’m certainly not a finance person. That is driving people to refinance and also gives them more purchasing power. The inventory staying low, is also adding to that.

If there is a lack of something, and there’s only one of it, and there’s five people who want it, well, that’s automatically going to drive up the price. It depends on how the inventory shift is going to be. I am sure that we’ll see much more inventory in the spring.

Once that levels out, the prices might level out as much. I had a glass bubble because I probably wouldn’t be selling real estate, I’d probably be off on an island somewhere. To answer your question, it ebbs and flows and ebbs and flows.

There’s going to be a little more of an even out, I don’t think there’s going to be a fall like we had in the financial crisis, as a result of every Tom, Dick and Harry being able to get a mortgage in a very creative sense.

Patti: Last question. Do you see any difference in terms of the days on market, or prices or activity, in terms of the cost of the home or the super luxury homes? As you guys define is two million and above, are they selling as quickly? Is there a sweet spot?

Lone: There sure is. There’s a huge sweet spot, and it’s in there somewhere between 475 and 850. A huge sweet spot. That’s your Millennium coming out to purchase again. We are seeing above a million selling as well. Again, condition driven, always condition driven.

The two million and above, prices are increasing with about one percent. They’re not moving quite as rapidly. Obviously there’s less of a buyer for that market as well.

Patti: It’s interesting, because, I’ve talked with people. They were looking at selling their home for two and a half million say, and taking advantage of the wonderful rise in prices. They were going to downsize into a smaller home, intermediate home. I was thinking to myself, that you’ve got transaction costs.

I feel you’re selling high theoretically, although one percent is not exactly high, to buy high. What are we getting out of the deal? For those of you who are listening, Lone, and I, and Emily are running numbers to determine the net benefit. In this particular case, does it make sense?

The real estate taxes are going to be lower. The cost of the ownership is going to be lower. If it is a three-year deal, it’s one thing. If it’s a 10-year deal, quite another. Everything is different, and you got to run the scenarios.

Lone: Everything is different and you do have to run the scenarios. There’s so many different money amounts coming into the scenario. You may end up spending more to fix up your house to buy for less. It’s definitely each individual situation is different and where are you selling and where are you buying?

Patti: As I listen to both of you today I think, “You know, it always does come down to people.” It really comes down to people taking the time to understand what’s important to each family, each person.

Then carving out a solution that will work primarily for them. It’s true in my business, it’s true in your business. It’s wonderful to have the access – if I may say – I’m so proud and honored I can pick up the phone and call Emily and say, “Emily, I’ve got a 35-year-old. They’re looking for a house, can you help me out?”

What are the dos and don’ts? Where are we looking? They’ve got little kids. I don’t know the schools anymore. What schools should they look at? Give me streets, give me places.

It just makes it easier for everybody involved. Thank you for that. Lone and Emily, thank you for joining us and thank you for joining the show.

If you have any questions, please feel free. Go to our website, keyfinancialinc.com. Give us your questions if you have particular questions on your property, real estate. Write them out. Get in touch. I’ll put you in touch with the best team in the area.

For those of you who are listening, we are recording this just before Thanksgiving. I would like to end this by saying thank you. Thank you for taking the time to tune in every two weeks to listen to these podcasts.

You make it all worthwhile. Your feedback has been unbelievable. I am so honored and I’m grateful that you are sharing it. I’m grateful that you are telling us what works for you and what doesn’t because that’s the only way we learn. Thank you for that.

Thank you for sharing 30 minutes of your precious time with us. Have a great day!

Ep60: 2020 – A Year to Remember or a Year to Forget?

About This Episode

As 2020 begins to wind down, are we going to look back on this year as a year to remember or a year to forget? The pandemic has certainly created significant hardship and loss for so many, yet there have also been some inspiring revelations. Patti is concluding her series this year with her special guest and friend, radio host Gregg Stebben. They discuss lessons they have learned this year because of the pandemic – both professionally and personally. Listen to find out how to lock in these lessons and move forward into 2021 with renewed hope and optimism for our future – as well as our finances!


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 again is Gregg Stebben.

Gregg is going to help me bring the year, bring 2020 to an end and help all of us to look forward to a bright and secure future. It’s been a difficult time, but I think that we’ve all learned a lot about ourselves, our businesses, and the world at large. What can we do with that newfound knowledge?

Gregg, thank you so much for joining me today and helping us to lock these lessons in to help all of us go forward.

Gregg Stebben: Well, it’s such a fascinating thing. I remember the last time a year got branded was the year 2000, because of Y2K. Oh my gosh, it was going to be such a disaster. It was a letdown. That was the last time I remember a year actually having its own identity until 2020.

Now, when something goes wrong, we look at each other, and we laugh. If we can laugh, and we say, “Well, it’s 2020. It’s the opposite of Y2K. That was a big letdown.” This has been exactly the opposite. It’s been one disaster after another.

Patti: I was just going to say, that is so true. If we were having this conversation this time last year, talking about 2020, I don’t think anybody could have ever anticipated what we faced. You couldn’t plan for something like that. The domino effect in our lives, in our families and our businesses, etc.

It’s so interesting that you go back to Y2K, because you’re right. That was branded, and that was going to be a disaster. The world was never going to be the same. It was. Let’s fast‑forward and say, “OK, 2020 happened. We had COVID, civil unrest, a really divisive election, and it’s over.”

What do we get to look forward to and what can we learn? What can we do with what we’ve learned in 2020?

Gregg: One of the first things to do is set aside time to reflect on the year, what happened, good and bad. As we’re recording this, I’m looking over and the Dow has crossed 30,000 for the first time. That’s not a bad thing. We could list all bad things in 2020, but that’s certainly not one of them. There have been in everyone’s life, great things too. Don’t forget about them, and take the time to reflect on them.

Patti: It sure is true, and just when you think you know what’s going to happen, who would’ve thought that we’d be seeing a Dow of 30,000? Who would have ever dreamed based on what was going on in the lockdown? There’s always reason to have hope, for me at least. I can say there’s always reason to have hope.

We never know what’s going to happen. We’ve always got to have plan A, plan B, plan C. Maybe this is the optimist in me Gregg, but I’m an optimist, I believe that things are going to get better.

Gregg: I think that’s also our nature as a people, as a nation. I think it is the nature of humans to always strive to make things better. Again, if you don’t set aside some time with yourself perhaps first, and then deliberately, consciously set aside some time with your partner, with your family, with your co‑workers, with your friends.

If you don’t take the time to think back on what the year was, what happened, and what did you learn, that is neither good nor bad necessarily, they’re just lessons. What are the lessons you learned?

You want to capture those after a year that’s been so unusual because they’re either lessons that are going to help you for the rest of your life, or they’re lessons you want to be finished with, and by golly, capture them so you can bring closure to them and move on from them if there are those kinds of lessons.

If you don’t take the time to reflect, if you just keep running, then the greatest value of this year is lost, because you didn’t take the time to capture it.

Patti: It’s so interesting because when you brought this topic up and you asked me that question, honestly, I did take the time to say, what did I learn? What is different? For me, if I can share it, what I learned is that we’re all far more resilient than I even realized, that we are adaptable.

I was pleasantly surprised to see how resilient my business was, my team was, and our clients were. I also learned that we don’t need a lot of the things that we think we need. Yes, toilet paper is essential, OK.

Gregg: We learned that this year.

Patti: We did learn that, absolutely, but really a lot of the stuff that we were doing and spending money on, it’s probably not necessary. It’s OK. It’s just not necessary. That was really important to take a look back and say, “Hey, we’re all still standing. We’ve got our families. We’ve got our businesses.”

We also have hope that we’re going to get through all of this and we’re going to be better because of it.

Gregg: One of the things I hear people talking about in a lot of different settings, and I want to get your take on this. I hear a lot of people reflecting on one of the biggest changes in their lives is how they view the other people in their lives. A greater appreciation for family members or partners.

Why, because you spent a lot more time with them and maybe you discovered things about them, you’d never knew. Maybe you found new ways to spend time together or things you had in common that you never knew. Those kinds of discoveries and that new love for your family and your partner, might not have happened if we hadn’t all been sheltering in place.

I hear people talking about the people they work with, for instance, in the same way, because of COVID we shared things we might not have shared, personal things, but we felt more comfortable or even desperate to share things that we wouldn’t have shared before. Or we were forced in a set of circumstances to work together in a way that we might never have worked together before, or even with people we hadn’t worked with.

Once you take the time to reflect, one of the things you discover is there is a newfound richness to many, if not all of your relationships that just got glossed over in the past, because we were running, we were doing other things. We were going other places. We were spending a lot of time looking at our phones instead of drawing on the people around us because we needed them.

Patti: It’s so true. I’m going to tell you a story. My husband and daughter are going to get mad at me, but literally this happened about two weeks ago. I’m at the house, my daughter is there and my husband, Ed, God bless him.

That man has put up with me for all of these years. He’s the most considered person in the world. He’ll run out for my favorite yogurt and just go and get it, or he’ll do this. He’ll fold the laundry because I don’t have time to do that. It’s just what you said, Gregg. I’ve had this opportunity to look at him and say, “Gosh, I don’t know what I would do without you.”

Literally it was a Saturday and he had done one of these just wonderful gestures of just random acts of kindness. I looked at him, I said, I just love you. I gave him a big old kiss mack on the lips, and my daughter was there and she’s like, “Eeeew.” Now, I’m like, “Ooh, this is my husband. What are you talking about?” She said, “I don’t really need the PDA. I know that you guys…”

I’m like, “Wow.” It made me think, I haven’t shown my own children, how much I adore their father. That’s something that I need to change because that’s not right. I love this man through and through, and he’s just everything to me.

I need to be more demonstrative and let the rest of the world know how special he is and important in my life. That to me was…It was truly a moment, not what I’m proud of, but nonetheless.

Gregg: Willing to share, which says a lot about you, Patti.

Patti: It’s something and to your point, whether it be our spouses, our kids, our team, same thing with the team. These people have been working their tails off literally it’s just been incredible.

With adversity comes tremendous innovation and boy have, we had our fair share of adversity this year, but man, I’ll tell you what, you can’t believe the stuff that my team has come up with. We’ve literally written software because our industry doesn’t have certain things that I thought we needed.

I just basically asked the question and these people went to work and I have an executive dashboard and a package that is helping me make that much more of a difference in the lives of our clients. That never would have happened if it wasn’t for COVID.

Gregg: I’m curious to know if you’re hearing from your clients about changes, they’re seeing an opportunity to make in their businesses, in their careers, with their families, because you get to talk to an awful lot of people in the work that you do every day.

Patti: I would say that for the most part, the things that I’m hearing are just exactly the things that you and I are talking about right now, and in the prior podcast. They include, what are we doing all of this for, why are we working like this, what are we doing with our cash flow, and is that the right decision?

They’re being more proactive about it. Instead of having the big humongous house with a $30,000 real estate tax, and all that stuff. It’s just not that necessary, and what’s important to us.

They’re having those conversations because of what they’ve been through. They’re spending more time together. Time and time again, I’ve heard from parents of adult children, loving the fact that the kids are coming home. They’re leaving their apartments.

They’re loving the fact that these 20‑something‑year‑olds are living at home, working and saving the rent money, and building up their own balance sheets. It’s been lots of changes for different reasons. It’s all been very good, very healthy.

Gregg: One of the things you mentioned early on in this conversation, and I think we all have said this or thought it to ourselves, is that I never would have guessed on New Year’s Eve 2019, how 2020 would turn out.

I want to get a sense from you about the importance of having a plan for 2021 that takes into account all of the changes around us. Also, that’s plan A, having a plan B, maybe a plan C, and maybe even a plan D because just as 2020 turned out to be quite a surprise, 2021 might turn out to be quite a surprise too.

It seems to me that it might take more than one plan, but have a couple of backup plans as well, and be prepared to pursue them if the year 2021 is as much as a game‑changer as 2020 has been.

Patti: It’s so true. As you were talking, I was thinking about this annual speech that I gave for the Economic Development Council, and it’s basically my outlook for the next year.

In January of this year, I’m going to have to tell everybody, “Well, that was a complete dud.”

“I was wrong on almost every single thing.” Yet at the same point, the message that I’ve always said is you’ve got to be in a position where you can pivot because nobody knows what’s going to happen.

Humility is probably one of the most important qualities a good advisor can have, a good doctor can have. Any kind of industry where you have to guide people into an uncertain future, the humility to admit that we don’t know. We believe, “By the way, if it doesn’t happen, here’s plan B. Here’s what we’re going to do.”

More importantly, having the ability to pivot, to do the things that are going to be better if that thing that we weren’t anticipating does occur. You got to be ready.

Gregg: Do you have suggestions for how our listeners might sit down and make a plan B, C, and D? Have you learned some things that you can share with the rest of us?

Patti: Sure, I’d be happy to. I think that whether it be a software package, or what have you, run your numbers – and I say that all the time, Gregg – run your numbers.

If we continue doing everything that we’re currently doing, paying the level of income taxes we are currently paying, aligning our cash flow, and choosing to spend in these areas, and save in those areas, how are we tracking? What does it look like a year from now, five years from now, etc?

Then what I would do is I would stress test that, “What if this happens, or what if that happens? What if somebody gets really sick and needs care? What if somebody dies? What if the market doesn’t do so hot? What if we go through a another really bad‑bear market? Worse, let’s run the numbers and say it lasts a lot longer. Are you still going to be OK?”

Number one, and number two, what should you do? What should you be ready to do if it does? You’ll learn where you might be vulnerable. If that thing does in fact happen, you’re not going to be vulnerable. You’re not going to miss out, lose, or be in financial jeopardy because that’s what we’re all worried about.

Gregg: I would think, and it’s funny because we talked about this in our previous conversation together.

It seems to me that if you have a plan B and a plan C, you are going to get peace of mind from going through the exercise, and you are going to get peace of mind from having them in place because you’ve eliminated as many of the unknowns as you can, and you’re ready, instead of afraid.

Patti: Exactly. You’re empowered. You just have a much better understanding, and you know what you’re going to do. That’s everything. It’s funny because I’ve always been a believer, Gregg, in this notion of “People don’t care how much you know until they know how much you care.”

That’s a saying that’s out there. It’s one that I have at my desk, and it’s so important in so much of what we do, and what other people do as well. I also believe that as part of that, that caring is also caring enough to be competent, to do the legwork. It can’t just be fluff.

I talk about that internally here all the time. It’s not about fluff. You got to do the work. You got to crunch the numbers. How many of our clients this year? Right now, we’ve got about a hundred clients. We’ve run algorithms to figure out who should be doing a Roth conversion.

It’s awesome. They wouldn’t ever have done this if we didn’t behind the scenes, run those things. Why do we do this? Because we’re not just fooling around. We do care. It’s going to make a difference for those people who qualify, where it makes sense.

For me, that’s where it matters because that message just comes from deep within. It’s not a bowl. It’s true, we’re doing that stuff, and people can tell.

For me, what I’ve so appreciated this year is the number of people who recognize that. It’s like the greatest feeling in the world, Gregg. It is the greatest.

When everything was hitting the fan, and have people reach out and say, “I can’t tell you how much of a difference it has made knowing that you’re there for us.” To me, that’s what it’s all about. Truly what it’s all about.

Gregg: You’re making me think about one other piece of the year‑end that might be worth us talking about, and that is for all of the changes in our lives because of 2020. People who need help.

There’s going to be people, especially at holiday time that are going to be alone, or need help that might not otherwise have. Their families can’t visit, either because of social distancing, illness, or financial circumstances because of COVID.

It might be worth us talking a little bit about looking around the world you live in and asking yourself, who might need a little help this holiday season, a little company, a little cheer, safe company, safe cheer? Who can I help or support during this holiday season?

Under other circumstances, they might have been surrounded by family, friends, and other loved ones.

Patti: You’ve really hit on a topic that’s near and dear to my heart, Gregg. I’ve always believed that loneliness is one of the…You talk about a pandemic; loneliness is a pandemic. That existed even before the virus. It’s awful. It takes 15 seconds to pick up the phone and call somebody and reach out. That is so important.

From a practical perspective, there are people who are really hurting that never were hurting like this before. There was a report about people in Dallas, waiting for hours and hours and hours in a line for the food bank. When they got to the front of the line, they were asked about their situation.

Gregg, do you know that 50 percent of those people reported that they had never been to the food bank before? That is what’s happening here.

There are neighbors, there are people in our own communities who could use some extra gifts during Christmas to give their kids. They could use that extra meal or that gift card. It doesn’t have to be huge. Again, those random acts of kindness that can make a difference.

Getting back to that Ed Brennan story, do you know what that guy did? I didn’t even realize this. I found out today. He has a turkey for Thanksgiving. He also ordered a ham. We’re taking it over to Salvation Army to give to somebody who may not be having a meal. I didn’t even know he did it.

That’s the stuff that touches me. It makes a difference because there are people who need some help right now.

Gregg: It does seem to me that when I think about this year that has gone by, and the many things that have happened, obviously COVID is the headliner, but there’s been so many other things that have been very traumatic, or jarring, or problematic.

Speaking for myself, in many cases what those events or those circumstances have done is to remind me about the greatness of people, the importance of the people around me, and open my eyes to the beauty of humanity around me.

I will look back on [laughs] 2020 with mixed feelings, but for me, I didn’t get sick. No one in my immediate family got sick. I’m so happy to be able to say that. I know this is a different conversation if you or someone around you has gotten sick. For me, and I hope for many others in the net, this has actually been a beautiful year because the hardship made me a better person.

Patti: I can’t agree with you more. For me, what I have gained from this is a real appreciation of people who are out there doing the work every day that I probably didn’t pay as much attention to, the people in Wawa who are there working whether they feel like being there or not.

There was a big emphasis in March and April with the essential workers and the people in the hospitals. That’s died down. It’s important that we don’t forget that they’re still in those hospitals working their tails off.

I had a conversation with somebody at our local hospital, and they’re fried. They are really fried. They’ve been there since March taking care of really, really sick people, just not being able to do enough for them, and watching them perish. I’ve been in that role. It is heart‑breaking. You go home at night. You cry. You feel bad for the families. It’s awful.

To have that day after day and not know when it’s over. These people, I can’t say enough about what they’re doing for our community. They show up, Greg. They’re there when it’s raining. They’re there when it’s snowing, the weather is awful.

They don’t want to get in their cars in the freezing cold. They certainly don’t want to get in their cars when it’s 75 degrees out and gorgeous. Yet, they do. They do because that’s what it’s all about.

I would say, at least for me and for our family, we’re going to go back to those essential workers and thank them, and whatever we can do to help them get through this next phase. We’re going to need them. We’re going to need them to have the energy to pull us all through.

Gregg: Well said.

Patti: Gregg, let me end with this. If there is one thing – you talked to so many people – if there’s one thing that our listeners can learn from this year, or what you’ve learned from this year that you’re going to take into 2021 as a different person, as you said, what’s going to be different in the life of Gregg Stebben?

Gregg: As you know, I have already made some big changes in my life, including a move. I’ve made some big changes in my relationship with money. The thing that I’m in the process of doing that is going to ultimately have the biggest impact on my life and the life of others around me is, it’s a whiteboard exercise.

Literally taking a whiteboard, erasing it and saying, “This is my life going forward.” Slowly, methodically, filling it with the things that are important to you. Letting nothing else get on that whiteboard. Then keep it in front of you so that, that’s what the rest of your life is full of.

Patti: Wow, that is poignant. It is huge. I’m going to end it there, Gregg. I can’t thank you enough for sharing that with us and for sharing your heart, your knowledge, your energy. I just love working with you. It’s been such a joy. I look forward to continuing in 2021. Thank you so much for joining us.

Gregg: Thank you, Patti. I’m going to say the pleasure is all mine and I admit it is a joy to be here.

Patti: This is great and you know what, thanks to all of you for joining us. You give us hope, you give us energy, you make all of this possible. I can’t thank you enough for joining us week after week and sharing these episodes and letting this thing go viral not to use a bad word by the way.

I really just appreciate all of you. I hope you have a wonderful holiday season. As always, we are here for you. If you have any questions, go to our website, keyfinancialinc.com. Always remember that we’re in your corner. I hope you have a great day.

Ep59: Automatic Millionaire – It’s Easier Than You Think!

About This Episode

There are more millionaires in America today than ever before. At one time, becoming a millionaire may have only been attained by the highly educated or successful corporate officers – now it can be attainable by anyone with the right plan and the right tools to get them there. In today’s episode, Patti sits down once again with renowned journalist and radio host, Gregg Stebben. Gregg confesses that while he has always been financially responsible in his life, he was not taking financial responsibility. But because of the pandemic shutdowns, an opportunity arose that he saw happening across America…people became more mindful where their money was going and how it was being spent. Patti shared the secrets of gaining financial freedom with some very simple tools that are available. Listen to find out how using these tools, automates your spending behavior, and when applied over time, the opportunity arises to become an automatic millionaire.


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 again is Gregg Stebben, journalist extraordinaire.

He and I are going to bring home this podcast program for the end of the year, and I’m so excited to talk about what we’ve learned with COVID and what we’re doing going forward. Gregg has so many great points and great questions that he was asking me, so we decided to record it.

Gregg, thanks so much for joining the show.

Gregg Stebben: Oh, Patti, it is always great to be here. It is such a pleasure and such a joy to be with you. Maybe it’s just me, but I’ve noticed it’s been a strange year. It’s not just me, right?

Patti: No, it’s not just you, Gregg. If there’s anything that COVID has taught us, is that there really are so many things that are really out of all of our control. Really, let’s think about it. We can’t control an invisible pathogen that swept across the Earth, really ending the lives of 1.4 million people.

It’s really a scary period of time. A lot of people are feeling disjointed and out of control. I think that the things that you and I are going to talk about, the questions you were asking me, I think, are really, really important right now.

Gregg: Your point about control is a really good one. I have felt, I think, the way almost everyone else has. I realized, in some part, I think, thanks to the conversations you and I have been having, I realized at some point during this long shelter in place period that there was one thing in my life I could take control of that I frankly I had avoided taking complete control of in the past. That was my money.

Patti: Gregg, that’s what I love about you. You’re so very real. It’s true, a lot of people just put their heads down, go to work, deal with their kids, and do all of these things, and it’s an afterthought. The upside to what’s happening is we are finding ourselves more at home.

A lot of people are, do find themselves having more time, and really are taking a look at their finances and saying, “Gee, I can’t control all the stuff that’s going on outside, but I can make better decisions about this.”

Gregg: Yes. I went through that, and I had to be honest with myself about how frankly irresponsible I had been about money. Look, I’ve made a good living. I am in a good place financially, but I always knew that I could do better financially and that I should do better financially.

That’s when I discovered, doing a little research, that only about 50 percent of Americans have a budget. I was part of the other 50 percent. Just the word budget would make me roll my eyes, and if I could, get up and walk out of the room. I wanted nothing to do with it.

I realized, thanks to COVID, that what I was doing was giving up control, giving up control of one of the most important, power assets in my life.

Patti: You are not alone. First of all, 37 to 40 percent of Americans are right where you are right now, Gregg. They’re being much more mindful of their money and where it goes. I am so with you. I am not a big-budget person.

I’ve always said to you before, to me, the word budget’s like the word diet. It sounds like I’m giving something up. It sounds like there’s sacrifice. I think that there is a different way to frame it. I think that, when you think about it, you’re just realigning your expenses. Instead of wondering where your money is going, tell it where you want it to go.

Gregg: Yes. Well, so, for me, again, you could probably say I started obsessing about this a little bit, partially because I was at home. I have had, I think like a lot of people, more time on my hands than normal.

Typically, when I had time on my hands, I would walk out of the house, get in the car, or walk out of the house and go do something. We haven’t been doing that this year. You’re at home.

Patti: Yeah, typically, you’re probably going out to dinner, going to the mall, or maybe even going on vacations that really aren’t happening right now.

Gregg: Interestingly enough, usually, once you walk out of your house to go do something, like go to dinner, go to the mall, or go on a vacation, what you’re actually doing is you’re doing something that has some impact on your finances.

I can tell you, I’ve been married for over 20 years. For over 20 years, my wife Jodie has said every year, “We have to figure out how much we spend on restaurants.” Every year, I pushed back on that. Truthfully, I didn’t want to know. I like eating out. We ate out all the time.

In 2020, we haven’t eaten out. For me, that was a huge realization, and frankly, an opportunity from this year that really set me down this road of taking more responsibility for my finances. I realized that, if I dove into our finances this year, unlike any other year in my adult life, it was going to be easier for me to dig into the data and evaluate it because we haven’t been eating out.

We haven’t been going to the mall. We haven’t been going on vacation. We really could look at what we spent. First of all, there was just going to be a lot less data in the spreadsheet, so it was less overwhelming.

Patti: Right, less transactions to have to wade through.

Gregg: Far less transactions. We could also look and really get a benchmark of what is important and essential because that’s almost all we’ve spent on this year. Oh, and some sourdough starter as well.

Patti: I love it. You’ve got to through something in there to get yourself through. That’s the key. I give you so much credit because just taking that first step is a huge deal. Just to accept and recognize that it’s something that you haven’t been doing, you probably should do it.

OK, inertia, forget about it. You’ve got to just start somewhere. You know what? Once you get started I don’t know if this is happening for you and Jodie, Gregg, but – people I’ve talked to have a sense of empowerment.

They feel more organized. They feel more in control. It’s a really good feeling. The decisions that they’re making are a little different. It’s not bad, it’s all good. I think it’s so interesting. McKinsey had a study, and what they found is that 40 percent of Americans have the intent of spending less money at the stores, but they’re doing more online.

What’s even more interesting to me is brand loyalty is out the window. They’re just going for the best deal, because of what you and Jodie are doing. It’s the awareness. Do you really need to pay those big-ticket prices when you can get pretty much the same thing for 70 percent of the cost?

Gregg: I like how you talk about control. What I found is, by really, again, for the first time in my adult life, being able to roll up my sleeves, dig into the data, and take responsibility for where we were and are spending our money, I did actually begin to get the sense of what it’s like to be responsible for my finances, in a way that I had never been responsible before.

I’ve always paid my bills on time. I don’t think I’ve ever written a bad check. I’ve always been a very responsible person, financially, but I never took responsibility for the whole of my finances. Again, I thought this year was, I have the time.

It’s a very unique and special dataset in my financial life as an adult, and I’m going to take advantage of that. We now do have a budget, and it doesn’t feel like I’m following a diet, to use your analogy. It feels like something I own instead of something that owns me.

Patti: Wow, what a powerful message for everybody listening today. I love the way you put it, Gregg. It’s the idea of you were very responsible, but you weren’t taking responsibility. There is that just slight shift in the way that you phrased it is huge, absolutely huge. Good for you.

I think the fact that it doesn’t feel bad, it actually feels good. You feel like you have control. It’s big boy and big girl stuff that we’re dealing with.

It’s your life, and you get to spend…You work your tail off. I know you, Gregg. You work really hard. I talked to my kids about money, and I talked about this concept. We would go out shopping, and the kids would beg.

“Mommy, can I get this? Mommy, can I get that?” I would say, “No,” and they would look at me. I say, “It’s not that we can’t afford that. It’s just that we don’t choose to spend our money that way.” That really has, I believe, gone a long way as they’ve become responsible adults, taking control of their own spending.

It just is, again, it doesn’t have to be confining. It’s just realigning how you use your money. That’s it.

Gregg: To draw on my personal experience again, instead of it being confining, I actually feel like I have more freedom. Not freedom necessarily to spend, but I think I have freedom from worry, from guilt.

I think we all have negative things associated with money. I think that’s just the nature of money. I have actually found that taking responsibility, owning the data, creating a budget…Part of it for me, frankly, was creating a process that I could stick with. I now have enough months to know that I will stick with it for a long, long time.

We might talk about what would that process look like, but I have found that it is, I think I sleep better. I think I used to wake up and worry about money. Not that I had any specific worries, but I just didn’t know. I was worrying about the unknown.

It’s not an unknown to me anymore. I think it’s actually brought freedom and a state of grace to my marriage, because Jodie always wanted to be more responsible about money, and I pushed back. Now, we’re aligned and we’re partners about our money. It’s our money. It should be something that we own together.

Patti: You know what? It’s fabulous what you have done. It just is. It takes that effort. It takes that recognition that it can’t be a one-off to develop a repeatable process that’s easy to follow. Over time, it just becomes a habit.

Those habits can compound over a lifetime like you can’t even believe. Kudos to both of you. I think that one of the things that I’d like to help everybody listening today is, how can we make this as easy as possible?

What are the hacks out there that can make all of this not a painful process, but for you, an empowering one, one that gives you that sense of freedom, of peace of mind? Anxiety is defined as fear of the unknown.

If you don’t have your arms around stuff, whether it be financial stuff, worries about the kids, or what have you, that’s where anxieties really increase. If we take away that fear of the unknown by just sitting down, getting one of these hacks in place that’s easy to follow, literally everybody listening in three months, in six months, you can feel like Gregg and Jodie do.

Here’s a question. How long, how many months did you go through? How long did this take you to get you from A to B?

Gregg: Well, the interesting thing is I have tried different tools in the past. We all know there’s Quicken. If you own a small business, Quick Base. There’s Mint, but those tools, what I’m about to say is not a critique of the tools themselves. It’s just that they never were a good fit for me.

I think one of the things I learned in this journey is you’re going to need some kind of tool to do this. It could be a spreadsheet. It could be Microsoft Excel. That’s fine, I think, but it needs to be a tool that works for you.

What I realized is I needed to think about the screens I already look at regularly during the course of a day and the tools I use on those screens. What I discovered was a product I had never heard of. It’s called Tiller Money.

What I love about it, and why it made this so easy for me, is it’s like Quicken or Mint. It downloads all the information from your bank automatically. It lets you categorize things, so it automatically categorizes things in the past. It automatically makes a budget.

It’s not a piece of software, and it’s not an app. It’s just something you add to your existing Microsoft Excel or Google Sheets account. It’s embedded in the spreadsheets that I already knew how to use. I always wanted to manage my money in spreadsheets, but I hated the idea that I had to download the stuff from my bank.

I had to import it into the spreadsheet. I then had to catalog all these things. This does all those things for me. Once I found a tool that made sense for me, it turns out that that was actually the biggest barrier. Now, I want to manage my money, because I don’t have to think about how to make the tool work.

I already know how the tool works. It’s a tool I use, a spreadsheet, every day.

Patti: It’s a really important point. You’ve got to make it easy. I think automating as much as you possibly can is the key for all of this. I love the idea of going into things that you’re already going to be going into.

Another tool that I really like is this tool called Simplify. What it does is it does the same thing. It pulls all of the data. It’s called aggregation. It aggregates all the data into one place, and it automatically categorizes your recurring payments.

You’ve probably heard, Gregg, the 50 30 20 rule. 50 percent of your expenses should be your needs, your mortgage payment, your rent, utilities, recurring payments that are just going to happen. 30 percent would be to your wants.

That’s that discretionary, those decisions that you make on a discretionary basis. Then 20 percent to savings. What this tool does is it takes those recurring payments that we all make. It categorizes them for you.

As a sidebar, I think one of the problems with a lot of these tools is you have to categorize them. Half the time, it comes in, it’s wrong, and it’s a pain in the neck to keep it up to date. Whereas these tools are really using smart technology, so you don’t have to do that.

It lumps them. These are all your fixed expenses, your recurring payments. 50 percent, whatever that number is, it is. Step two is you put in the amount of money you want to save each month. It’s looking at how much is being deposited each month, and then it automatically uses the algorithms that say, “OK, here’s what’s leftover. Go have at it.”

It’s literally doing the budgeting for you in terms of making sure that the needs are taken care of and your savings are taken care of automatically. Then you get to spend the rest. You don’t have to add up how much am I spending on utilities, how much am I…?

You can, if that works for you. Everybody is different, to your point. Figuring out what’s going to work for you, that, to me, is the most important thing. Something that you’re going to be able to stick with. Once you’ve found that, it’s just a matter of looking at it every once in a while.

It’s a real eye-opener for people. It can tell you, “Gee, if I save the money first and spend what’s leftover, I’m going to hit all of the goals that are important to me. I’m going to educate my kids, get that second home, retire in comfort, and never run out of money.” It is a done deal. Then you get to spend the rest.

Gregg: You know what I love about you, Patti? Which I just learned from you right now, as you said.

Patti: What’s that?

Gregg: I am a micro guy. I’m looking at managing my money by the month. You are explaining to me how, “Oh, Gregg, if you manage your money by the month, what you end up with” – this is what you are so brilliant at is – “You actually get to own the big picture.”

I hadn’t even thought about the big picture of retirement, a second home, where do I travel? I’ve just been thinking about where do we spend our money every month? You’re absolutely right. Those big goals are the things that are going to motivate me, and I think motivate most people, to follow through on the program.

Patti: That is exactly it. Here is the beauty of this. Let’s think about what’s happened with COVID, where people are aligning their expenses, and what that means. The savings rate in America is higher than it has been in 30 years.

The question is what are people doing with that money? Let me motivate you a little bit more, Gregg, OK? You could stick that money in the bank, or let’s just do something simple. Let me just take an IRA. Let’s say that you’re going to put $6,000 into an IRA each year.

If you get seven percent over 30 years, that will compound and grow to $600,000. By the way, I need to tell you that this idea came from Ben Carlson who writes a blog called “A Wealth of Common Sense.” He is so great at just simplifying things and showing everybody how easy it is.

Frankly, not everybody can save $500 a month, but I want to show you the impact of compounding over time. Let’s say that we increase that by $20 a month, just $20. Not a lot, just $20. It might mean less stops at Starbucks or not stopping at Wawa in our area, whatever the case may be.

What do you think the difference would be 30 years from now at that same seven percent?

Gregg: Just to show how bright I am, $20 a month, that’s $240 a year, right?

Patti: Yep, over 30 years.

Gregg: Over 30 years, I’m going to say over a million.

Patti: Actually, the difference, what I was looking for, it adds $260,000 to the $600,000, so you were on the high side. You must be an aggressive investor, my friend.

Definitely. If I did the numbers at eight percent, you’re definitely in seven figures. Now, what’s interesting about that is, as people get raises, as people’s life changes or what have you, just by automatically increasing your savings – whether it be to your 401(k) or these outside savings – it can make a huge difference.

Here’s the question, Gregg, because this is what we’re talking about today. We’re talking about taking control of your money and taking control of your future. It’s fine and dandy to be able to save that money and increase it by $20 or $50 a month, but where is that money, where is that going to come from? It’s got to come from somewhere, right?

Gregg: Yes.

Patti: I want to share an idea with you and everybody listening, an idea that’s called snowballing. Here’s the way it works. When you’re looking at your bank account, when you’re looking at your expenses, just pick something to stop.

It doesn’t have to be big. It could be a cable channel. In my case, when I was doing this, honest to goodness, I’m a financial planner. I’m embarrassed to admit this, Gregg, but here it is. I have been subscribing to a legal application.

I’m going to give the name. I will tell you it’s $39 a month. I have subscribed to this thing for, like, three years. Ask me how many times I’ve used it.

Gregg: How many times have you used it, Patti?

Patti: Not once.

Gregg: [laughs]

Patti: It’s crazy. I wanted to have it, just in case, if I need a lease, or I wanted to look at changes in the Pennsylvania healthcare power of attorney, or whatever. I just always like to have access to the latest and greatest.

Have I ever opened the application? No. 40 bucks a month. I stopped it, and there’s money. That’s real money. Again, compounded over time, my children, my grandchildren, they’re going to have that money that I was spending on this legal service that I wasn’t even using.

Gregg: One of the things I discovered by taking this responsibility for my money is I didn’t have anything for $40 a month I wasn’t using, but in total, I probably had more than $40 worth of things I wasn’t using.

I think this is the design of programs like that. Once it starts hitting your credit card, if you don’t look at your credit card bill very closely, you forget. You forget that you’re paying $3 for this, $5 for this, $1.99 for this, $4.99 for this. I was shocked and frankly embarrassed by the things I had been paying for that I turned off.

You’ve given me the big picture idea here, which is to take the money I was already spending and to put it into something that’s going to grow exponentially over time, thanks to compounded interest.

Patti: I think, for you and for everybody, you want to automate it. In this case, what we’ve just talked about is becoming an automatic millionaire. Literally, an automatic millionaire. You just redirect that money that you were spending on these things that you weren’t really even using, and what a difference it’s going to make.

You’re going to be able to retire sooner than you ever dreamed possible, have higher cash flow. Once COVID is over, and it will be over, go on those wonderful vacations. Do the things that you want to do, and you’re doing it because you’re choosing to.

Because, again, you’re not wondering where your money is going anymore. You’re telling it where you want it to go.

Gregg: Did you just come up with automatic millionaire just now?

Patti: You know what? It’s a concept that I read about. I think there was a bit about it at some point. I’m telling you, Gregg, I use that all the time. Literally, you just run the numbers, and you just earn that seven percent per year. You can’t not be a millionaire.

Gregg: I love that. I’m borrowing that from you, and you get full credit every time I say it.

Patti: Thank you so much.

Gregg: I want to be an automatic millionaire, so I’m going to do what it takes to be an automatic millionaire.

Patti: Doesn’t that do something for that anxiety that you were talking about, those sleepless nights, and the worries of not really knowing, are you OK? Are you tracking? When we do these things, these are small life hacks that make a huge difference over time.

Not only in terms of 30 years from now but right here, today. It’s making a difference for you and Jodie, and it’s going to make a difference for everybody listening to this podcast today.

Gregg: I want to just add two other things to that that I think might be useful. These were things, one motivated me. That was, on top of the fact that I realized that the year of COVID made this a unique year, and probably an easier year to get started, I also realized, it’s the end of the year.

Get it done now before 2021 starts because if you don’t tackle it and get it done now, you’ll put it off until next year – which, if you’re like me, is what you’ve been doing for 20 or 30 years. This is literally, you’re at home, it’s the holidays. You have more time off from work. You can’t go anywhere.

Find a tool and get this done. I can’t tell you how much the end of the year motivated me. Then talking with friends about this. One of the things I realized is, I don’t have kids, but my friends who do, we started talking about how, if they took this on, if they got their kids involved, first of all, the kids could help them with the tool, the automation part of it, because kids are great at that.

The other thing is, if you get them engaged in how your family is budgeting money, it’s only going to help the entire family for everybody to understand where the money comes from and where it goes. Why not also set up an account for your kids, so they can begin to budget for themselves, too, so they don’t have to reach my ripe old age before they start doing this for themselves for the first time?

Let them start now, while they’re 10, 12, 15, or 17?

Patti: You know what, Gregg? That is an even better idea than the one that I used. With my kids, my hack was I would get them a debit card. It would be a joint debit card, and together, we would go through where they were spending their money.

Again, that takes time. There’s a hassle factor. It wasn’t necessarily being categorized. I basically looked them in the eyes and said, “Hey, let me tell you something. I know what you’ve been doing in college,” right?

Gregg: [laughs]

Patti: All of a sudden, it made them realize that, yes, they are accountable. I really like using, taking that one step further and empowering them with a tool like Tiller, Simplify, or whatever. Again, it doesn’t matter what the tool is, although I will say one thing.

You want to be cognizant of the privacy settings on these tools. Some of them will sell your data, and you may or may not be comfortable with that. Just go into this with your eyes wide open, OK?

Gregg: I think that’s a really great point. The thing I realized as you were describing this is a benefit of getting your kids having their own budget and using the same tool as you is, not only can they help you master the tool, but they then become your tech support down the road when you need more help with the tool.

Patti: Oh, yeah, baby. Let me tell you something.

Gregg: [laughs]

Patti: I am joining this century. I’m changing, and I’m getting an iPhone. I have a Samsung. I’m finally getting an iPhone, because I want to be able to do the FaceTime. Let me tell you something. Converting my information from Android to Apple, not an easy task. I’m letting the kids do it.

Gregg: They’ve got the whole holiday period to get it done, is my guess.

Patti: They’re going to need it, with all my pictures, that’s for sure. [laughs]

Gregg, thank you so much. This was so great. I always worry about topics like this, because I don’t want to bring up the “you’ve got to be careful where you spend your money” type of conversation.

It makes people feel guilty. It makes them feel that anxiety or that I’m shooting on them. Today’s podcast, and what you’ve brought to the table, has been so helpful in terms of how empowering it can be, and how it can bring peace of mind, a sense of freedom, and a sense of, “Wow, we’re really making progress.”

I can’t thank you enough for joining me today, Gregg.

Gregg: Oh, Patti, it is such a pleasure. Thank you so much for letting me join you here.

Patti: It’s always fun. It is amazing what comes out of these podcasts with Gregg Stebben. For those of you who are listening, stay tuned, because Gregg, is going to be joining me for a final conversation about 2020.

What have we learned? Let’s go back. Yes, it’s been a difficult year, but there have been so many good things that have happened as well. What’s some of the perspectives that Gregg can bring to the table? He’s got a worldwide global view of things, and I certainly have a thing or two to say myself.

Thanks to all of you for joining me today, and if you have any questions, or you just want to get in touch with us, give us a call. 610-429-9050. Go to our website at keyfinancialinc.com. We’re here to help. We’re here to serve you.

Thanks so much for joining me, and I hope you all have a great day.

Ep58: The Election is “Almost” Over – Now What?

About This Episode

Now that the most contested Presidential election in history is almost over…now what? The markets seem to be holding steady and the housing economy is still booming. There has been much political commentary from both sides as to what is going to happen to the economy in 2021 and beyond, under a new President. Is there really much to worry about? America has a strong, supportive Federal Reserve and history proves that election outcomes rarely drive long term market and economic activity. In today’s special episode, Patti has a candid conversation with her Chief Investment Officer, Brad Everett. They put politics aside to reveal what they believe will happen in the markets as a result of this month’s election.


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.

OK guys, the votes are in, and the election is almost over. Joining me today is our chief investment officer, Brad Everett. We’re going to discuss the election and the outcome, and what that might mean for your portfolio, your money, and maybe even your life. Brad, thanks so much for joining me.

Brad Everett: Thanks, Patti.

Patti: Let’s get something out of the way. Let’s just acknowledge, Brad, that we understand that people might have strong opinions about the election, and the last thing that I want to do is make anybody mad at us, right?

Brad: Yeah. We want to just make sure that we make everybody mad at us equally. We’re probably going to make everybody upset. Let’s evenly make everybody upset.

Patti: It’s very democratic, right?

Brad: Exactly.

Patti: Everybody is treated equally. There you go. I love it. Here’s the deal, you guys. We’re going to be talking about the economy and the markets.

There are a lot of issues that whoever is elected to lead our nation and lead Congress, etc., they’re going to be making decisions that affect things that may or may not have an impact on your portfolio. Things like gun control, or gay marriage, stuff like that, they’re really important. Civil rights is another example. They’re important.

We’re going to focus on the things that might have an impact on the economy and the markets. Just understand that we recognize that there’s a lot more to the office than that.

Brad, when we were talking about this on Friday, you brought up a good point, and I think it’s important to differentiate about the policy decisions that may have a direct impact on the economy and the markets, and the ones that may have an indirect impact. Can you give me an example of what each one might be?

Brad: Sure. Just to step back a little bit, there are plenty of things that we could debate that have no impact on our portfolio at all. How much time did we spend debating the updated baseball playoff postseason? We didn’t, because that doesn’t filter through to the economy, and probably our clients don’t care much about it either.

Patti: It probably doesn’t impact the baseball players, either, right?

Brad: They probably also don’t care, exactly. They just want to play. The first question is, does it affect the economy? Does it affect your portfolio at all? If it does, there’s a second level of things that just very directly influence the economy, things like a stimulus package, or tax rates, or things like that.

There’s another level that maybe on the surface doesn’t seem to, at the first order, affect the economy, but long term, it will filter down, like immigration, or foreign relations, or health care law, things like that. Those are all ostensibly about something else, but then they will have some kind of long term economic effects also.

Patti: That’s a really good point. Here we are in the midst of COVID, and you think about health care law and health care in general. I think, for many of us, it’s made us painfully aware of what is lacking in that area.

I also think it’s important to recognize that the policy makers and leaders can change on a dime. Look at how quickly they’re getting a vaccine through the FDA. Normally, it is a painful process, would take up to 7 to 10 years to dot all the i’s and cross all the t’s, and we’re going to have one in 7 months instead of 7 years.

You don’t think about that in the election and things of that nature, and as they’re grappling with the hundreds of decisions that they have to grapple with when they are doing their debating.

We talked about direct and indirect. Let’s talk about what we do know. Let’s talk about the things that, at this point, November 16th, as we record this podcast, the things that we do know. We do know who is likely to be our president. How about leadership in Congress? Is it a sweep? Is it going to be divided? What’s the impact of that?

Brad: Yeah, I think the House Republicans is settled, for the most part. That’s going to be Democratic House. As of last week, I think we’re just waiting for the runoff in Georgia in early January. I think currently it’s the Senate’s 50 to 48, Republicans to Democrats.

If you value a divided government, you would want at least one of those runoffs to be a Republican, and I think that’s the way it looks. It might be one to one there, so you’re looking at 51 to 49 maybe in the Senate. You would have what you would consider a divided government, sure.

Patti: You know what I don’t get? I don’t understand, we elect these people, right? It’s so close, 50/50, 51/49. That’s going to change the trajectory of all of their decisions, based on what they’re labeled, a Democrat or a Republican? It makes me wonder. We elect these people to think, don’t we?

Brad: Yeah. I guess that’s always been the nature of democracy, is that the people that are least qualified to make the decision are the ones that get to vote.

A law professor or somebody that studies politics and government doesn’t get extra votes. Everybody gets one vote. That’s the way it plays out, right?

Patti: Yeah. It’s interesting how things are presented to them and how that might sway their votes, right?

Brad: Sure.

Patti: It’s funny. I heard a story. I think we were talking about this earlier. There was one politician. I’m not going to say who it was. It was under a different administration.

They said, “I really agree with what you’re doing here, but if I vote yes, there is no way I am going to win in my state. I’m sorry. I agree with you. I think it’s a great piece of legislation. I’ve got to vote no. Otherwise, I’m not going to be in office in two years.” That’s really wrong. That’s just crazy to me. Again, that seems to be the way it goes. It is what it is.

Brad: I guess until we can come up with a better way to do it, I think that’s what we get.

Patti: What I think is fascinating is the Capital Group came out with a great statistic. Since 1933, if we had a unified, all three, both houses as well as the president, all the same, Democrats or Republicans, the average annual return of the S&P 500 was 10 percent.

If you had a unified Congress but then the president was of either party, like if it was all Democrat and then the president was Republican, the average annual return was 7.4. If you had a split Congress, what we might be looking at here, 10.4.

Brad: It’s interesting.

Patti: When it comes down to it, let’s face it, since Herbert Hoover, every president has presided over a stock market high. We talk about the value of a calendar day.

Gee, it just so happens that the market was going gangbusters before COVID. Trump was in office. We got COVID. We’re having a recession. If Biden had been in the chair, if his butt was in the chair when COVID, chances are we would have been in a recession as well, right?

Brad: Yeah. I don’t know how you would have avoided it. We’ve talked about the president is elected on a schedule. When that day comes, that he goes into office and sits down in the chair, there’s things that are in place that are far more important in controlling the economy than he.

You’ve got interest rates, the Fed. You’ve got new housing starts. You have manufacturers’ indices, things like that that are all far more powerful in determining the economy than just a single person.

Patti: Really, I can’t help but think that the CEOs of these major corporations, are they going to be changing what they do based on who is in office? They may be worried about certain things, but they’re going to try and drive profitability no matter what, right?

Brad: Yeah. I think the business cycle is far longer than any president’s term. Even if you were an eight year term president, the business cycle is longer than your duration in the office. I think you’re just a person that…I don’t know. A lot of times, I think of the president as our number one PR person. You’re in there to…

Patti: Good point. They’re our voice. I suppose that to a certain extent…Well, I’m not going to say it. You’ve got to recognize that that’s the role. They lead. They set the tone in terms of what they want to have happen. It’s also really important to keep in mind that there are other forces, macro forces, that are far more important. That train has left the station.

Let’s talk about what we’re thinking in terms of what they’re thinking, what they’re thinking about. It’s also important, Brad. Let’s face it, for example, President elect Biden came out with this incredible tax package, tax proposal, that he’d like to push through.

To your point earlier, he made some campaign promises when he was running for just the nomination. Then those promises, it changed a little bit when he got the nomination and now he’s running for president.

Brad: There’s always been a tendency to be more extreme in the primaries and come back to the middle in the general election. You have to appeal to your own party. You want to be the standard bearer for that party and be the shining example of what the party is supposed to be. You’re pure. You’re probably more extreme than most.

Then, in the general election, you’ve won the nomination of your party. Now you’re in the general election. You have to moderate your views for A, the undecided voters and the people on the other side. If you hope to convince somebody from a different party to vote for you, you have to moderate yourself.

Of course, a campaign promise is still a promise, but I don’t know if you can…There’s a big difference between a campaign promise in the primaries and what actually gets put through as legislation. You have to analyze the likelihood of any of those things going through before you can really worry too much about something that was said six or nine months ago.

Patti: I would imagine that if, in fact, we do end up with a divided government, it’s going to moderate some of those proposals anyway.

Brad: I think it happens naturally, absolutely.

Patti: Now, let’s break this down into the macro stuff, like the fiscal package. There are so many Americans that are still hurting. I saw, on the news this morning, there was a line of cars in Dallas for the food bank. It was miles long.

When they finally got up to the front of the line, they were interviewed. Over 50 percent of those people had never had to go to the food bank before. That’s really scary. There are so many people who are hurting that never really were hurting before.

This is a really unusual recession in that it is really focused on the service sector. The manufacturing sector is fine. Typically, a recession, it affects all areas, but this is really hurting the service sector. There’s so many people that work in that.

We might get a fiscal package. It’s probably going to be trimmed down. It’s not going to be another $2 trillion. It is what it is.

Brad: It sounds like the stimulus is more to smooth it out for everybody. It doesn’t address the underlying cause. Obviously, a stimulus package doesn’t solve COVID. It doesn’t get people back to work. It’s to soften the blow a little bit.

Patti: It’s more like a relief package. It’s not stimulus. We’ve had stimulus packages. They can be really beneficial. This is really a relief package. In that case, I guess we have to count on the Fed to continue its policy.

Brad: You would assume that they pick up the difference and keep rates low and carry forward with…I wouldn’t expect a huge change from them.

Patti: If we don’t expect the tax hikes to go through…Keep in mind, the tax hikes are really aimed at high income people, people making over $400,000. If we don’t think that the dramatic hikes are going to go through and the spending is going to continue, if not even accelerate a little bit, what does that really mean? Something’s got to give.

Brad: I wouldn’t think it’s far fetched. You’d have to assign some probability to some increase in taxes. If I think back to the Laffer curve in college…I haven’t really thought about it much since, but you think about it today. I don’t think we’re at the point where…

Think of in your own case. If you knew your marginal tax rate was going to go up two percent, do you think you’d just retire early? You would continue to work hard and care about your job and try to innovate and be creative and things like that.

The opposite is true too. If your tax rate went down two percent, I don’t think that you would find some extra level of work ethic or creativity that was just waiting for the tax code to change before you decided to release it.

Ultimately, taxes are based on profit and earnings. Obviously, taxes will never be 100 percent of profit. They’re never going to be more than your profit.

In most cases, as long as the taxes, it’s a minimal change maybe you shift the brackets and add another one at the top that wouldn’t surprise me at all, but I also don’t think that causes a significant drop in productivity or output in the country at this point.

Patti: In terms of innovation, I think that one area of innovation that might really be something that could affect what we do for our clients and our clients in general would a change in the estate tax law.

If more of a person’s wealth is going to be taxed at what he’s proposing 45 percent in Pennsylvania, we got another 4.5 percent, so 50 percent of the excess over, I think it’s, $3.5 million is going to go to the federal government. Right now, you have to have $11.5 million before that even becomes a factor, and even the rate is lower currently.

In terms of what we think about and how we help people, that’s one area that I think that we’re really paying attention to. It’s not based on income. It is based on wealth.

This has been an issue from the day I started and became a CFP. it used to be really, really bad. Then it got a little better. Then it got a lot better. It could get bad again. We need to be proactive about that.

Brad: It seems like something that changes quickly with almost every administration.

Patti: Here’s the question. We’ve got this deficit. We’ve got this humongous debt with the federal government. If tax rates don’t increase and deficit spending continues, that debt’s going to get even worse. What is the tell tale sign that we’re getting into trouble?

Brad: I guess you would probably have some kind of…The market would just react. If spending doesn’t go down, which…No president has ever really been able to curtail spending in any significant way.

Patti: Even though they promise in the campaign, even though they say to balance…

Brad: There’s another example, absolutely. If that doesn’t change, then the Fed just buys more and more Treasury debt, which, I guess, eventually you would think would lead to some kind of inflation and higher interest rates.

Once the market adjusts, then that’s probably…At this point, it hasn’t yet. It hasn’t become a problem in the eyes of investors anyway. Once that happens, you would…

Patti: Basically, it’s inflation, is the real tell tale sign that something’s got to give, right?

Brad: Yeah, I think so.

Patti: Let’s drill down a little bit. We’ve talked about some macro. Now let’s talk about some of the policies. We’ll talk about domestic versus foreign. There’s three major themes that I think really could be relevant. Again, just talking about the economy and the market.

The three major themes that we’ve talked about internally would be, obviously, healthcare, COVID, COVID, COVID, infrastructure, and then regulation. Let’s go back to the top, talk about healthcare.

Brad: Healthcare is a tough one to predict. There was a huge surge in just the market cap of healthcare stocks when it looked like the odds were in Biden’s favor to win, maybe with the idea that he would fund ACA more. That’s the only thing I can think there. The market doesn’t always offer an explanation for why it does things.

Patti: I know.

Brad: It just seems to do things without letting us know why.

Patti: It’s a pain in the neck. We’ve got to guess.

Brad: The moderating factor there is Biden has been willing to support policies that limit drug prices and things like that. It’s hard to know what would net out there. There’s some benefits for healthcare but also things that you would think may hold an individual company back a little bit.

Patti: The third thing that I talked about was regulation. It’s so interesting to see how quickly they’ve pushed this whole thing through with the vaccines. They seem to be really making it easier for these drug companies to innovate, to use this RNA technology, which had never really been used before but seems to be really effective.

It’s not like they’re turning a blind eye, by any stretch of the imagination. These vaccines are going to be safe, in spite of what you might hear on social media. That’s really opened up other opportunities in healthcare to innovate, to use computer and technology and things of that nature. That’s so exciting. At the same point, is it already baked into the cake?

Brad: A great healthcare analyst would be able to piece together these companies have a better chance than these companies. It’s probably, obviously, more narrow than just saying the healthcare industry by itself, but yeah, absolutely.

Patti: You think about a Moderna. Moderna came out with its news this morning. They’ve got their vaccine. It’s also over 90 percent effective. What makes it different than the Pfizer vaccine is that it doesn’t need to be in this 95 sub zero freezing temperatures.

Brad: It can live in a fridge for 30 days, I saw.

Patti: Exactly. That really is an interesting development that makes it…Again, getting back to supply chain, now we don’t have to have thousands and thousands of these freezers. Maybe we’ll still need them, but we don’t need as many maybe.

That’s another thing. Let’s go back to just the crisis part. It’s so interesting. You talk about innovation and just the human spirit. The fact that companies were able to pivot on a dime. You go from making cars to making ventilators. You’ve got even small businesses, they’re in the mask business. I got an email today. Do you want to put your logo on a cloth mask?

These are great ideas. These are things that could help people. It’s amazing how just when it hits the fan, we rally. We can get things done. That’s true no matter who’s in office because it’s needed. By the way, I believe that to be a fact because it happened not just in the United States but worldwide. That innovation is happening all over.

We’ve talked about healthcare. What about infrastructure? For years and years and years, Brad, large value, dividend paying companies, these smokestack companies, have languished. Last year, the large value under performed by 14 percent. It’s never been this long a period of time and that wide of a gap. What do you think?

Brad: I would think that is one of the places that both sides have expressed an interest in trying to move forward on. It’d be great if they could get in a room together and actually make some progress. That’s all you’re hoping, that they can work out the details. That’s something that would be beneficial. Both sides have shown to be interested in that.

Patti: The infrastructure companies or the infrastructure projects, that includes climate change, right? Does that include those areas or energy or ways of bringing things to us a little bit easier, a little better? Pipelines, etc.

Brad: They were probably be defined as different sectors, but there is a lot of overlap there, sure.

Patti: Those are examples of things that are near and dear to people’s hearts, the climate change. That could have long term implications from an economic perspective. What we do about it, yeah, companies could benefit. Yeah, their stocks would benefit, but it really does have important implications much longer term.

The third thing, regulation. We talked about that a little bit. You and I both know, in our own industry, they finally got legislation through called Regulation Best Interest. It’s a pain in the neck from our perspective. It increases our compliance costs tremendously, but come on. It’s been a long time coming.

I’m embarrassed to say that the industry even has to be legislated to do what is in the best interest of your client. Like I said, it’s embarrassing. Yet it happened. It’s good. Americans are going to be protected because of it.

Regulation, it doesn’t necessarily mean it’s good or it’s bad. It just is. Sometimes, there are extremes that are happening that need to be reined in. That’s a good example of one of them.

Another example might be the antitrust regulation that seems to be bubbling up for technology companies. Yeah, on the one hand, Google, for example, they own the market. They own search.

Did they do it unfairly? What did they do to make sure that Bing didn’t get popular or some of these other search engines get popular? Did they just build a better mousetrap and because of that we all go to Google?

Brad: Now that they have it, are they doing something harmful with the position that they’re in?

Patti: I guess that’s for them to prove. Same thing with an Amazon. We’re all understanding how convenient Amazon is. I will tell you, I’m embarrassed to tell you, that I order paper towel and toilet paper on Amazon. I’m stocking up, baby, because it’s easy. It got delivered. I don’t have to have that big old thing in my shopping cart, where I can’t fit anything else. Drives me nuts.

Anyway, regulation is important. Let’s talk now about foreign policy. That’s an important topic, especially with the new administration. You think about China and the tariffs. That was such a big deal for such a period of time. Yet, again, this morning, again, breaking news. China signed trade policy with 14 other nations, not the United States. Where does that leave us?

Brad: I was thinking about what you said before about planning. Apple was the great example of when do they start, when do they commit to building something. Just having a policy that’s actually known, whether it’s a good or bad policy, at least you know.

Patti: That’s a good point.

Brad: Does Biden provide at least some kind of consistent, stable…Whether you like the policy or not, at least it’s known ahead of time. That allows the CEOs to make plans. Once you can make plans, then the relationship becomes a relationship. At least they’re planning. They know what to expect 5, 10, 15 years down the road.

Patti: Speaking of foreign relations, we’ve got to remember that Britain is nearing the end of its transition period with Brexit. The end of this year, it’s done. Their economy is really suffering right now. That’s happening there.

Canada’s doing pretty well, but Ethiopia is lurching on a civil war. Africa, they’ve got their things going on. Myanmar, 50 percent of the people in Myanmar don’t have access to literally basic things like water, public transportation. There’s stuff going on around the world.

As human beings, I think that COVID has really opened everybody’s eye that we are a human race. We’re not just Americans. We are a human race. Wouldn’t it be cool if we could really all pull together and solve problems. After COVID, what else can we solve together? Science is there. People, when we collaborate, it’s unbelievable.

I’ve got to tell you. Even when we’re all in here…We’re not all in here all the time, but when we’re together, just the brainstorming from our different offices and “What do you think about this,” I will tell you, Brad I don’t mind saying it in front of everybody that’s listening here I value our conversations that lead to this podcast.

Like what we talked about on Friday and here it is on Monday. I said, “Brad, we should talk about that and let other people hear what we’re thinking as it relates to this election.” Here we are.

That happens because we get together and we collaborate, always looking for how can we make a difference, what should we be doing for our clients, and wouldn’t it be a good idea if they heard about it too.

Foreign relations is really important. Looking at all of these problems from a worldwide basis, really key. What about immigration? I would really like to understand, Brad. I’m going to pretend I don’t know, I don’t understand this. Why is immigration so important to the growth of our economy?

Brad: That’s one of the ones that’s fraught with political tension. It happens as nations become more and more prosperous. The birth rate drops. We are not replacing our workers as fast as…

Patti: We’re not making babies.

Brad: Exactly. You’re right. Everybody’s comfortable 1.9 to 2.1 kids, and that’s it. If the labor force is still, that’s one of…Labor force growth and productivity growth is what goes into GDP growth.

If you have more employees and those employees are more effective, then the economy is bigger than it was the year before. If the workforce doesn’t grow, you can hope that productivity increases, but that’s stagnated over the last decade or so too.

Patti: Which is surprising to a lot of people. Really, when you break it down, the productivity has stagnated. You would think with technology, etc., we’re more productive, but we’re not.

Brad: It seems to come in major bursts. The computer was great. We’re still working on computers. There’s always minimal, incremental changes and incremental growth, but there’s certain innovations that come over time that just put it into hyper speed for a while.

Back to the immigration thing, if you can figure out immigration and make everybody comfortable with it, that is potentially a source of new employees and of a growing workforce. That’s something that you have to figure out.

Patti: OK, Brad. Let’s pull all this together. There are basically three conclusions that I think we can summarize our conversation. The election results are probably not going to displace the other factors that were already in place, a supportive Fed, stimulus that’s in the economy, $4.5 trillion sitting in cash on the sidelines.

That stuff eventually is going to come in and begin to work. That’s probably going to have an impact on the economy as well as the market. These things tend not to be calendar based. You go back to 9/11. We would have gone through a recession if Clinton was in office instead of George W. Bush. Fair to say?

Brad: Yeah, absolutely. You made a point last week too when we talked about how would you even identify…There’s no such thing like Obama’s economy, or Trump’s economy, or Biden’s economy. When does one stop and one start? The day they change positions?

Patti: That’s a good point. That is a really, really good point. If the economy, if the markets do well, and they do do well, let’s say that under Democrats, they do 11 percent, and Republicans, they do 10 percent. Are we going to change investment policy based on that?

Brad: No. Absolutely not. Even if you knew with 100 percent certainty that one party would outperform the other party by two percent a year, or one percent a year, is that actionable? Would you do anything about it? The answer is no. What are you going to do instead?

Patti: Exactly. As we ask these questions to each other, the questions are, is it something that can be predicted, number one, and number two, is it actionable? That ultimately is a great framework for everybody listening in terms of your own portfolios. Is there any predictive value, and is it actionable? Most of the time, the answer is no.

The issues that we care about also as it relates to the election, gay marriage, civil rights, gun control, they may have little to no impact on your portfolio. Making extreme choices based on those issues, which are important, I totally get it, I wouldn’t necessarily invest one way or the other based on that.

Brad: It doesn’t tell you to buy small cap stocks or large cap stocks or bonds.

Patti: Safe to say that the economy is just a tad more complicated, right?

Brad: Yeah, I think it’s probably true.

Patti: Number one is, understand yourself, understand when you need the money, what you’re comfortable with, what you can live with. That is the most important thing.

Finally, let us not forget the importance of perspective. Go back to 1970. $10,000 invested in the S&P 500 in 1970 is worth about $1.6 million today. I’m going to say it again. Take that in, you guys. $10,000 is worth $1.6 million today.

During that period of time, we’ve had Democratic presidents, and Republican presidents. We’ve had several wars, some declared, some not declared. We’ve gone through 12 bear markets, the near collapse of the financial system, and, by the way, a worldwide pandemic. I believe, but I cannot prove, that this trend is probably going to continue.

What do you think about that, Brad?

Brad: Totally agree.

Patti: We’re good, irrespective of who’s in the White House. The longer term trend is going to continue. The innovation, the spirit of human beings, not just Americans, human beings, is going to continue.

Brad, thank you so much for your perspective, your humor. You just make doing this stuff so much more fun.

Brad: Thanks, Patti.

Patti: Thank you. To all of you, I hope you have a fantastic Thanksgiving. I hope you connect with the people that you love, one way or the other, face to face, or virtually, for many of us. As you go through and as you talk about these issues, share this information with them. Share the podcast, and please feel free to share the fact that we’re here.

We really appreciate you. We appreciate you tuning in. Thank you so much for your time. Until next time, on Patti Brennan Key Financial, I hope you have a terrific day.

Ep57: Real Life Pandemic Opportunities and Solutions

About This Episode

For the past seven months, local, state, and national governments – as well as other governments around the world – have been in crisis management mode. Decisions have been made according to the best scientific data available at the time to ensure public health and safety. Many people have been making some life-altering decisions during the quarantine as well. Decisions affecting their financial futures and well as their personal futures. Once again, Patti sits down with a nationally renowned radio host, Gregg Stebben, to discuss some life-changing decisions that clients, friends, and family are making during this pandemic. Tune in to hear the “upside” of this pandemic – does it and can it pertain to you?


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 Greg Stebben. Greg is the ultimate journalist and a very dear friend.

In our last podcast, we talked about the impact of COVID. I had the great confession of what was life before COVID. What changes have I made? What has happened in my life, and Greg did the same. It was really interesting to see how our life is different, even though we are in the midst of this pandemic.

We thought it would be really good to tie a bow on this thing and have a session or have a podcast about, “What do we think life is going to like look like after COVID.” Greg, welcome back. Thanks again for joining me.

Gregg Stebben: Patti, it’s great to be here. The topic of after COVID is huge because, first of all, we all want there to be an after COVID. After COVID is the rest of our lives.

Patti: Oh, boy. You couldn’t have said it better. You couldn’t have said it better. Some of the things that we’ve done, I’ve done personally, and that you’ve done personally have set that whole thing in motion. What do we want the rest of our lives to look like?

There’s a lot of positive that is coming out of this crisis. As with any adversity, there is going to be some good that comes from it. We’re seeing that in our day to day lives.


Gregg: Well, right. I hear talking to friends, them talking about changes and how they’re working, for instance, or even the changes in their kids’ education. There’s challenges to that, of course, but there’s also positives as well.

I know that you actually did a Forbes SHOOKTalk with Dr. Joe Coughlin from the MIT AgeLab. I’m wondering what kind of things you discussed there about the world after COVID?

Patti: That was a fun podcast, also. Dr. Coughlin is a very dear friend of mine as well. I’m on the board of the MIT AgeLab. Forbes wanted us to put our heads together. Doc Coughlin, with his incredible research and the lab. My angle was more from a practical perspective.

Together, we were doing some brainstorming again on a podcast similar to this on what does what does life look like after COVID?

Joe brought up a really good point. He said, “What this has done is it’s accelerating the trends that were already in place.” People were adopting technology. It’s just that we’re adopting it that much quicker.

I think that so many good things like telemedicine, the fact that insurance companies finally got off their you know what and decided to approve telemedicine visits. That’s making life so much easier for everybody.

We went through a period of time where people were not going to the doctor when they really needed to be going to the doctor. Once that initiative took hold, the visits are now approved by insurance companies, people are going back for regular health care. That’s going to help for the rest of their lives.

There’s trends that were beginning but really hadn’t taken hold. They will now.

Gregg: One of the things that’s interesting about telehealth that I want to bring up, this comes from my position of having interviewed a lot of CEOs at a lot of events, is the telehealth industry has been building, and developing, and growing for a long time.

Became very sophisticated and mature as if it was all driving toward a need exactly like the need from COVID.

I almost feel the same way about, for instance, remote work. All these platforms got built and developed and reached a level of sophistication. Yet, never had the kind of adoption that we’ve had since the beginning of the lockdown.

Where would we have been if those platforms, and frankly, if those entrepreneurs hadn’t invested in those platforms so that they were there ready and waiting for us?

Patti: Yeah, it is interesting. Everybody’s talking about the stock market and how tech companies are dominating the stock market in terms of the growth. Honestly, that’s for good reason. They have put us all in that position. I mean, even from a practical perspective.

I was talking with Bernadette, who works with me, and she was telling me about her mom. Her mom made the switch from her old phone. I won’t mention the manufacturer to an iPhone.

Their mom lives in Chicago and was really feeling so isolated. What the iPhone now allows her to do was FaceTime. Bernadette said it’s a game-changer. She calls every single day. She’s connected again.

There is a perfect example of because of COVID…We talked about this. People make changes for one of two reasons, inspiration or desperation. Her mom was just so lonely, and she made the change. It’s made all the difference in the world.

There’s a lot of good things that are happening. You mentioned the remote work. Dr. Joe and I were talking about the fact that people are working from their homes. In some respects, it’s more difficult because it’s clunkier. You don’t have the collaboration that often happens just spontaneously, but the work is getting done. That’s the most important thing.

They have an ongoing study right now that I was actually surprised to hear about. This ongoing study is asking workers, “What do you prefer? Do you prefer to work from home or do you prefer to work from the office?”

What they’re finding is more and more people are saying, “Yeah. I kind of want to go back to the office. I miss, I miss the people. I miss the collaboration. I don’t feel like I’m as important. I don’t feel like I’m as visible. I’m worried about my career.”

Those are all very real fears that happen if people are working remote. Again, with any kind of a fear, is it just a perception, or is it real? Time will tell. I was surprised at that. Everybody always thought that they wanted to work from home. Now that they’re there and they have it, it may not be everything that it was cut out to be.

Gregg: I love the example about Bernadette’s mom because FaceTime if we looked at the statistics, has been used very heavily by certain younger demographics. I would bet that as the iPhone owner ages increase, the use of FaceTime on a regular basis decreases. Yet, you’ve just shown us an example of where that’s quite possibly changing.

I’m wondering if you are seeing behavioral changes in your clients like that that really surprised you. Are your clients comfortable doing things in a virtual environment today that perhaps they wouldn’t have been a year ago?

Patti: It’s very interesting. That’s a myth. There’s a myth out there that people who are over the age of 50 or 55 just won’t adopt the technology. They’re just not into it. In fact, the statistics are proving exactly the opposite. That given a little bit of time and patience, you teach it to them, they are so excited. They’re all about it.

Even a year ago, if you would have asked me, Greg, “How do you think your clients would feel if instead of getting paper reports in the mail every three months, they’re just going to go online to get their reports?” I would say, “No. They really liked the mail.

They like to have the paper, etc.”

I got to tell you, because of COVID, we couldn’t put those reports together. We couldn’t get everybody together. It’s a cumbersome process, to begin with, us. You should see the emails I’m getting about this new site. I mean, they love it.

This is another example of don’t necessarily make assumptions about how people will receive something. Why don’t you try it? Ask them.

The other thing that I’ve been surprised at and pleasantly so is how flexible everybody is. There’s just this built-in understanding that we’re in unusual times, and they’re willing to try things like Zoom, having meetings that way, etc. It’s working out great. They still feel connected. They know that they’re well taken care of or checking in. It’s working out really well.

Gregg: I want to ask you about one last part of your conversation with Dr. Joe, who’s from the MIT AgeLab. We cannot talk about these kinds of changes in the adoption of technology without also talking about what’s happened with education during the age of COVID. What kinds of things did you and Dr. Joe discuss relating to education?

Patti: It’s a really important issue because it has to do with the future of our nation because our young people are our future. They need to be educated. Unfortunately, because of the concerns of COVID, a lot of the developmental progress that occurs in school is not happening. Really focusing on what are the potential solutions.

We can talk about whether a school should open or whether they shouldn’t. If they open, what does that look like? There’s a general understanding that online learning is a good band-aid, but it’s not the same.

I can tell you that from my perspective, this is something that my company, Key Financial, is really honing in on because here it is, September, our schools are closed. I have these lot of young families.

What I’m looking at is opening up a part of our office area, hiring someone to help the kids if people want to bring their kids in, sit them in front of the computer, we’d have somebody rotating. I’m just beginning to do that brainstorming with my team, whether it be somebody from the outside.

Let’s say we’ve got five parents with children under the age of 12. One parent takes care of the five kids per day, and so they rotate. The kids get to interact with other children, which is really important. We have an adult who’s a parent who’s overseeing their learning, etc.

By the way, their real parent is right around the corner. If there are any issues, they can just come on over and see the kids. Again, here’s another example of how we Americans are creative. We’re going to focus on a solution that’s going to work for everybody.

As I said, literally before we started today, I went into my group, I said, “Let’s just try something. We can always adjust as we go along, but if we don’t try, then the kids are going to suffer and parents are going to suffer. They’re going to feel like they don’t have enough time to do their work, and they don’t feel like you know, it’s this…”

I just remember because Greg, I think you know this. I have four children, as well. I remember that feeling of never feeling like I was doing anything well, whether it be being a mom, or being a financial planner, being a really good wife, a sister, all the different roles that we all play.

When you’re too scattered, when there’s too much going on, it’s hard to do anything really well. We’re going to find a way to make our team realize that they’re doing a great job. I want to make it easier for them.

Gregg: All I can say in response to that Patti is a year from now, I’m going to be sitting in an audience. I don’t know if I’ll have a mask on or not. I don’t know if the seat next to me will be full or not because of social distancing.

I have a feeling I’m going to see you on a stage talking about the success of this program talking to a TED stage audience because that is one of the most exciting things I have heard related to COVID in a long time.

Speaking of next year, when you’re giving that TED Talk, we will be passed a landmark event, which is a presidential election. We will either have an incumbent or a new president. It would be worth us talking about that. Are you willing to do that?

Patti: Absolutely, because it’s on the minds of every American right now. Yes, COVID is a major issue, but so is this presidential election. You know, Greg, I don’t know about you, but when I go back to other elections, I can’t remember one where there was such a confluence of really big issues, really big events, things to be concerned about.

Obviously, we’ve got COVID. Underneath that major, major topic, we’ve got the testing or the lack of testing, the FDA, the CDC. Nobody seems to be talking to each other.

We’ve got the impact of the potential of another shutdown.

With the flu season coming about plus COVID, what is that going to look like? That’s really scary to think about another shutdown. What’s the economic fallout from all of that? What’s going to happen with the stock market?

We’ve got 31 million Americans who are receiving some form of unemployment. That is so many people. We didn’t have close to that during the financial crisis. The three trillion dollar check that the federal government just signed to deal with the fallout from COVID.

What is that going to mean from a tax policy perspective? Does that mean that our taxes inevitably are going to go up for everyone? These questions are on the minds of everybody as we go into November.

Gregg: How do you look at these issues and then translate that into conversations with your clients? Because your clients must be asking you about this every day. What are the questions they ask? What are the concerns they have? What is the counsel you offer?

Patti: It’s a really good question. For this election, there are so many social issues on top of the economic ones, whether it be the racial injustice. I don’t know if you remember this. Remember, immigration? Remember, China? That was the big topic, China and trade, and tariffs. That seems to have fallen by the wayside, but they are also really important issues.

What is our standing like to the rest of the world? There was a very interesting article the other day that asked the question of people in various countries, France and Germany and Italy. Who do you trust more, the United States or China? For the first time, China got more votes. That’s really, really unfortunate.

Gregg: These were people in the United States who said they trusted China more than the United States?

Patti: No. These were people who are in France.

Gregg: Oh, in France.

Patti: People who are in Italy or Germany. Good question. Thank you for the clarification. It’s really, they just don’t know how to take us. I understand that. Yet, there are concerns on both sides with both candidates.

It just is a very confusing time to answer your question directly. Normally, what I would say is if you look back at history, one human being, a man or a woman, really can’t impact a nation to the point of turning it from capitalism to socialism or to make it so that we go into a massive depression.

Our democracy is so important in terms of calling people on their stuff. Granted, yes, the president can sign a decree, and certain things can happen. For the most part, that can happen. In terms of my clients and the questions they’re asking, obviously are, “Are our taxes going to go up?”

All I can say is, “Probably.” Second question would be, “What are we going to do about it? We’re going to do something about it. We don’t have to do anything about it until November 9th.”

Third question is, “What do you think about the economy and then what do you think about the market because the market doesn’t seem to be reflecting what’s happening in the day-to-day lives of Americans today.

“Why is all of that going on, and what should we do about it?” I will tell you that there are certain assumptions that people make. For example, Republicans are better for the economy. Republicans are better for the market.

Actually, when you look at the data, that is not true at all. In fact, there’s only three presidents, Gregg, who have presided over a negative stock market. That was Herbert Hoover, Nixon, and George W Bush.

Now, Hoover, we can talk until we’re blue in the face of all the mistakes that he made and how some of his decisions made the depression last a lot longer than it needed to. Nixon, obvious reasons, Watergate, inflation, the oil embargos.

Then George W Bush, he started with 911, the tech bubble, and then he ended with the financial crisis. Ironically, all three of those presidents are Republicans. In fact, if you look at the history, it’s about even-steven in terms of Republican versus Democrat and how the stock market performed.

The president probably can’t influence our portfolios as much as people think. Yes, they can influence tax policy. Yes, certainly, from a social perspective, it is important, and I would say to everybody listening today that you want to pay attention to the issues.

Listen to how each candidate is answering the questions, and then make the best decision you possibly can. We’re not going to know until Gregg to your point, a year from now, who that person is and what they’re following through on.

Gregg: I want to ask you a question that I imagine a lot of other people are wondering too. That is, between now and election day, can the fact that an election day is coming influence both the markets and the economy?

Is there almost a struggle between an incumbent president wanting it to improve and be great and someone running against an incumbent, not wanting it to be bad, but in some ways benefiting from it being bad and we’re already on a very difficult trajectory?

Patti: It’s a good question. Yeah, I would expect major drama. I would expect that the markets are going to be volatile. I think that on the one side you’re going to hear a lot of negativity, things are awful, awful, awful, and on the other side, things are pretty darned good.

How do we take in that information? What do we believe? I think ultimately it’s going to come down to each individual saying, “Is my life better today than it was four years ago?” And trying to look at some of the issues.

Hopefully looking at some of the issues where they may not be impacted by the riots, for example. They may not be impacted by some of the China and the trade and things of that nature, but ultimately, they will have an impact on our lives.

Gregg: I want to ask you one last thing, Patti. That is when you are scrolling through the news on your iPad or your computer or your phone, and you want to bring in some different perspectives on what’s happening in the country, what’s happening in the world, and particularly what’s happening with the economy, are there a couple of people or outlets that you go to that you find yourself recommending to others?

Patti: Yeah, it is interesting. I would have to say that I haven’t found that yet.

I am looking. I’m really looking. I think that what’s unfortunately happening is the news has become entertainment. Because of it, I feel the need to listen and read all of it, and then try and assimilate what resonates with me. What do I believe?

I think that the debates are going to be important. I just think that’s going to be really important. The conventions that are going on right now, it’s a lot of fluff, and I think it’s wonderful. I’m not getting a lot of substance from either of the conventions, so I’m hoping the debates will help to bubble up a lot of the issues and help me make a decision that I’m comfortable with.

Gregg: I want to go back to your response about news because I want to sum it up in the way…I want to summarize it with what I’m taking from what you’re saying because I find it very valuable. I think what you’re saying is, don’t restrict yourself to a couple of people or a couple of outlets, but read it all.

I would add, also, ask yourself, what is the potential bias of that person or that outlet. If they tend to lean towards one thing or another, take that into account in what they’re saying just as you do in any conversation you’re having with anyone.

The more you read, and the more opinions and voices you hear and read is, I think you’re saying, the better off you are because you become well rounded and in a better position to make decisions that are right for you.

Patti: Exactly. Absolutely, because then you’re listening to both sides of the argument, and you’re hearing, hopefully hearing, both sides of the argument because these people believe in this stuff. They’re not just spewing.

Although sometimes it comes across that way, there are some facts there that we need to pay attention to. When you hear, for example, defunding the police, obviously, I say, “What in the world are you thinking? You got to be crazy. We have to give them more money, not less.”

Yet, when you dig into where they’re coming from, they’re not saying cut them off all together necessarily, they’re just redirecting. Again, I have my opinion on all of that, but let’s not just read the headlines.

I think that’s the most important thing.

Gregg: Patti, thank you so much for letting me join you and talking about these issues from the election to, well, what’s going to happen after COVID.

Patti: Thank you so much, Gregg, for joining me again, and thanks to all of you who are listening to this podcast. We appreciate your time. We appreciate your input. I hope that it’s helpful to you. Feel free to go onto our website at keyfinancialinc.com.

Let us know what you want to hear about. We’re here for you. Thank you so much for joining us today. Take care.

Ep56: What Does Life After COVID Look Like?

About This Episode

For the past seven months, local, state, and national governments – as well as other governments around the world – have been in crisis management mode. Decisions have been made according to the best scientific data available at the time to ensure public health and safety. Many people have been making some life-altering decisions during the quarantine as well. Decisions affecting their financial futures and well as their personal futures. Once again, Patti sits down with a nationally renowned radio host, Gregg Stebben, to discuss some life-changing decisions that clients, friends, and family are making during this pandemic. Tune in to hear the “upside” of this pandemic – does it and can it pertain to you?


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

Gregg is the ultimate journalist, a very dear friend of mine joining me today from his home. Gregg, I’m going to let you tell that story.

It’s a great story. Really, what we’re going to be discussing today is life after COVID. What has COVID done in terms of helping all of us think about our day-to-day lives, our day-to-day work lives, family life? Gregg, give us a little bit of an overview of what you and Jody have decided to do as a result of the time that you’ve had together during COVID?

Gregg Stebben: Well, it’s funny. I didn’t realize this interview was going to be about me. I thought I was going to be interviewing you. Nice move there, Patti.

Patti: Well, you know what?

Gregg: Nice transition as we say in the audio business.

Patti: It takes one to know one, Gregg.

Gregg: First of all, thank you for letting me join you again on the show again. It’s interesting. In April we did an interview together about COVID. In June we did an interview about COVID. I don’t think I thought that in August we’d still be talking about COVID as if we were…I don’t know if we’re in the middle of it, but we’re not out of it. That’s for sure.

You mentioned some changes that Jody and I have made in our lives. If things sound a little different in the background here, it’s because I’m literally standing. I’m still in my studio, but there’s no furniture left in my house…

Patti: Wow.

Gregg: …because we have taken advantage of this time. Look. I think we’re like a lot of couples and a lot of individuals, too. That is, there’s important things you should talk about. There’s just never time, or there’s never a reason. It’s never a priority. It’s always something you can put off until the weekend, next weekend, next weekend, next weekend, next weekend.

This we couldn’t go anywhere. I might have shared this with you before. One night early on I woke up in a cold sweat. This is when there were so many more unknowns. I thought, “One of us is not going to make it.”

Patti: Oh, that must have been so scary.

Gregg: It was. I thought, “It’s OK if it’s me that’s still here.” I don’t mean because I hope Jody dies, and I don’t. I meant it exactly…

Patti: Sure.

Gregg: …the opposite. I would not want to pass away and leave a mess for her to have to deal with on top of…Well, it would be devastating to lose me, of course. I’m being facetious, but…

Patti: For all of us as well, by the way.

Gregg: All of you, but I think my financial and legal commitments with Jody are much more complicated than, for instance, yours and mine, Patti. I just thought, “She and I have been married over 20 years. We don’t have kids. We remarried later, but we never did the things we should have. We never wrote a will. We never did a living trust.”

We never did any of those things because we always put it off. In the morning, when she woke up, I said, “We’re doing this starting today.”

Patti: Good for you.

Gregg: Once we started on that conversation about a living trust – what does it mean, finding an attorney to complete it, and etc., etc. – that forced us to talk about a lot of other things. The thing about COVID was we had the time to do it. We recognized that we may never have the time to again to do it again. We didn’t know what was coming. Maybe one of us wasn’t going to make it.

It motivated us to get it done. It forced us to talk about, “Well, what are our priorities?” Then I shouldn’t tell you this, Patti, because it’s embarrassing. We really were in a good financial place, but more by luck than design, and it forced us to talk about that. Where do we want to go and what do we want to do? Where do we want to be?

In the six months of COVID, we transformed all of that, sold our house. We’re moving tomorrow and we’re going to start a whole chapter of our lives. My view of this is we, too, were COVID statistics. We’re just not bad COVID statistics. We’re actually good COVID statistics.I think almost everyone can look at their life and say, “Even if I never got sick, I’m still a COVID statistic. Something happened here. It’s either been a positive outcome under difficult circumstances, or I didn’t grab the ring and make it a positive outcome. It’s not too late to start.”

Patti: I have to tell you. That is a powerful story. First of all, kudos to you and Jody for taking the time. A lot of times people need that facilitator to get that ball rolling. I know we’ve been doing that for the last six months because people are much more aware of this thing called life and the fact that it is short. The fact that, jeez, this isn’t a dress rehearsal. Are we really happy? Do we like what we do? Do we like where we live, etc.?

We call it a deep-and-real. Let’s take the time. You said it better than anyone I’ve heard it. “We’ll do it next weekend. We’ll do it next weekend.” All of a sudden, we turn around, and we’re 75 years old and look back at our lives and say, “Wow. There were so many more things that I would have wanted to do, but we didn’t do them.”

Gregg: “Or I want to do going forward, and I can’t afford to.” By the way, one of the things I want to say here because I think this is important in my conversation with you, Patti. It took us doing that homework for ourselves to now feel like we’re comfortable working with a team like yours.

We’re now ready for Patti Brennan, whereas I don’t think we would have even known how to start that conversation with you and your team in the past. We had to get ourselves mentally prepared to get the professional help we need. We weren’t even there yet. Now we are.

Patti: It’s interesting because that mental preparation is all about motivation. What happened with COVID for you and for so many people, is that all of a sudden you were really motivated. You really realized that, “Wow. We got here by accident.” There’s a saying in our industry. “Most people spend more time planning their vacations than planning their financial futures.” It’s so true.

Gregg: I want to say I’ve spent more time planning dinner than I…

Patti: There you go.

Gregg: …previously planned my financial future.

Patti: Sure. Sure. When you’re proactive about something like that and you really take the time to have that conversation to decide, “Gee. What are our values? Where do we really want to live? What do we really want to do? What does work mean to us? Where do we get our purpose in life?” and all of the things that you and Jody went through.

I would also submit that, while you said that you’re embarrassed to say some of this stuff, I will tell you, Gregg. The best compliment, the most important thing, that I would say is that, whether you just do it as a couple or you do it with a financial advisor, an attorney, or what have you, is to recognize that we’re all human beings. We all have our vulnerabilities. Nobody is perfect.

Most of the time when I’m working with people, I’m asking the questions that I think someone should ask Ed and I. I’ll often offer, “Gee, if you were asking this of me, I would tell you, ‘Well, let me give it to you real.’” That way it opens that door for that person to be honest with themselves and to let that conversation continue.

Gregg: Myself included obviously, why do you think this is such a difficult thing for us to, as you said, make it real with other people? Is it shame? Is it the fear of looking stupid? Do you have some sense, given the number of people you’ve worked with, why it’s so hard to just put the cards on the table so you can make them better?

Patti: I think you’ve identified two of the things. People feel like they’re going to be judged. People feel ashamed. They feel like they should be further ahead than they actually are. What I would say is that I nip that in the bud in the first 30 seconds. “You’re not alone. This is why we exist. Let’s just have fun with this process,” or “Let’s just look forward, not backwards.”

That would be number one. I would also say, Gregg, and I think that yours and Jody’s experience is a perfect example. It has to do with change. It’s really difficult for people to make the kind of changes that you two have chosen to do. Most people will change for one of two reasons – inspiration or desperation. For you two, it’s a little bit of both.

The desperation part comes out of, “Gee, we could wake up tomorrow and have COVID. We may not be here in two weeks. What do we want to do about that now? Let’s get our affairs in order.” That sense of urgency was very real, it was palpable, and you did something about it.

The inspiration part comes from, “Let’s assume that we don’t get COVID. What’ll we want the next 30 years to look like? Do we want to live here in Raleigh, North Carolina, or do we want to live somewhere by a beach or mountains or what have you?

Now you’re choosing to live your life the way you want to live it. The hardest part is to identify what that looks like for you two.

Gregg: What I think is interesting, this process for us…I love how you talked about desperation and inspiration because what I…It started desperation. I thought if one of us is going to die and there’s a mess, we have to clean that mess up. That’s desperation.

Patti: Sure.

Gregg: It then transformed into inspiration because we were removing the desperation. We were removing the fear and the uncertainty. The word I would use to describe where I am left today, and I think I can speak for Jody too, is there’s come, over both of us, an incredible peace of mind and serenity because the details are taken care of.

It enabled us to evaluate, honestly with ourselves, where are we? Where do we want to be? What do we want to do? Where do we want to go? That, you mentioned going to the beach or going to the mountains, I always thought, eventually, we would live by the beach.

Well, tomorrow we’re moving to a house in the mountains. I don’t think we would have even been able to come to that kind of decision together had we not cleared or cleaned up the mess in front of us first, so there is this calmness that’s come over me, and I think Jody would say the same thing.

You cannot put a price on that, even though the reason it all happened is because of this horrible thing called COVID.

Patti: No question about it. I think that you’ve nailed it. When people’s lives are dominated by anxiety or fear, fear of the unknown, how are we doing, are we going to make it, what’s it going to look like, once you clear that out of your psyche, it allows for more creative thinking, more possibility thinking.

That is so important in terms of your overall happiness and that thing that everybody just really, really desperately wants, and that’s peace of mind. You know that this stuff is taken care of, and we all have stuff.

It doesn’t matter, again, whether…It doesn’t matter what your net worth is. I mean that from the bottom of my heart. We’ve seen it with people with very modest lifestyles and modest net worth, and I see it with huge net worth.

There’s always stuff, details. Get rid of the details, whether you do it yourself or you delegate it, and then that allows for that more creative, again, the possibility thinking and, “What do we really want out of our lives?”

Gregg: I want to make a transition now to something I think you have a unique perspective on. That is, I want to remind our listeners, or your listeners I should say. I want to remind your listeners that long before you were a wealth advisor, you were an ICU nurse.

I know that when you look at what’s happening around COVID, you understand it in a way that most of us do not. On top of that, you’re also hearing from your clients about the impact that this is having on their lives and their thinking and their perspectives.

I want you to give us a view of, when in the mind of Patti Brennan, you put those two things together. The understanding as a former ICU nurse, and the understanding as someone who’s a wealth advisor with lots of people depending on you and talking to you for comfort today, what do you see or what do you think when you think about COVID?

Patti: It’s interesting. To a certain extent, we’re right back in the ICU. We’ve got people who are really, really worried about this infectious disease that is invisible. We don’t know who’s a carrier and who is not, and we’re getting conflicted reports about what we’re even supposed to do.

As a sidebar, I was in California helping my son move from San Diego to south of LA. Flew in an airplane, helped him do all of that, flew back and, of course, we’ve quarantined because that’s what we were told that we were supposed to do.

Here we are, Gregg, 13 days into the quarantine, and then the CDC comes out with a report that says, “We were kind of wrong on that. Even if you are visiting a state that has an outbreak, you don’t have to quarantine for 14 days.” I’m like, “OK.”

It’s just things are changing left and right. I think that from a medical perspective, we have to be very, very cautious, understand and remind ourselves that this is going to be temporary. This is not going to last for the next 10 years, or at least we hope.

We hope that there’s a vaccine. We hope that it’s going to be effective. To really focus on the immediate steps to protect ourselves, both physically from a health perspective, as well as in all of the other areas. There’s been a domino effect on the economy and the markets.

31 million Americans are receiving some form of unemployment right now. That’s devastating. This is so much worse than the financial crisis. We have to be cognizant of the impact of that on people who are coming in and people that we’re communicating with on a day-to-day basis.

It’s so easy to let it bring us down, but again, I go back to that possibility thinking and recognizing that it is temporary, that we’ve got to take our medicine, recognize what works, be open to some of the things that we’re hearing about now in terms of testing and etc.

Also, I would say not to necessarily respond or react to some of the hype that might be out there. Get the facts. Take the time, go on the CDC website, go on the government website. Hopkins has a great one as well.

Who is really vulnerable? How can we protect the most vulnerable in our society? That, to me, is the most important thing that we can do.

Gregg: It’s interesting when you bring up the most vulnerable because I think we all know that the most vulnerable are people in certain age groups. If you’re over 85, you’re at a high level of vulnerability. If you’re over 75, the vulnerability is a little bit less.

We’ve also heard stories about people having incredibly long, lingering, and frankly, unpredictable or unexpected symptoms. Can you talk about why that is? People are suffering from all kinds of symptoms that you wouldn’t expect them to suffer from, from something that we thought originated in the lungs?

What are you as a former ICU nurse hearing that you understand about COVID that you wish the rest of us understood too?

Patti: You’re exactly right because initially when it broke out, we heard stories of people on ventilators and not enough ventilators to go around to treat all the people where the shortness of breath was so acute that they couldn’t get air.

What they’re finding is that, while it does originate in the nasal passages and in the mouth. Then eventually goes down to the lungs, it’s really turning out to be more of a blood vessel disease where it’s an inflammation of the blood vessels. The really devastating impact of that is that it’s creating excessive clotting. People are throwing clots left and right, having heart attacks, having strokes. They’re developing myocarditis, which is an inflammation of the heart.

Pneumonia is a by-product of all of that. With this particular virus, it’s not the forerunner, it’s just something that happens along with everything else, the liver is being affected, a third of patients end up on dialysis, and many of them have to stay on dialysis even six months later. Literally, it is a virus that has such a systemic impact on all organs of the body. That’s the scary thing.

That’s the most difficult thing for physicians and experts to treat. Now, again, there are things that are working, what they’re finding is that even though someone’s PO2, which is oxygen saturation might be below 90 percent, which would normally be “OK, we got to get this person tubed up, get them on a ventilator, etc.

What they’re finding is that let’s not put them on the ventilator as quickly. Maybe give them a rebreather, which is it’s forced air through the mouth but it’s not a tube into the lungs, when you put a tube into the lungs, it’s so much easier for that person to get pneumonia. They’re finding better ways of treating this.

It’s interesting, Gregg. I don’t know if you remember this, but one of our first podcasts about COVID, one of the things that you had said that I often think about is, “I don’t know if I ever want to go on a ventilator.”

Gregg: I was just thinking about that.

Patti: Remember that?

Gregg: I do.

Patti: It’s so funny because, Gregg, you were and I said, “Oh, Gregg, don’t do that. Ventilators are really important because they get people over a hump.” That is still true. What they’re finding is that with this particular virus, yes, it’s really uncomfortable to be gasping for air, as these patients are.

Oh, my goodness. I can’t think of anything more difficult to watch as a nurse than watching someone gasp for air but if we can get that air into their lungs without having them go on a ventilator, the outcomes are turning out to be better.

There’s the dexamethasone which is a steroid is helping and there are things that are helping, but it’s the transformation of the how we’re, I say, “Wait, you know, I stopped being a nurse a long time ago,” so for the record, everybody…

Gregg: Absolutely.

Patti: As we think about what the Federal Reserve does, now it’s creating a lot of money. It’s got these assets on the balance sheet. First question is, OK, well, these assets on the balance sheet happen to be treasury securities, mortgages, etc.

The Federal Reserve is a separate entity. To me, again, I’m nerding out on you, Gregg, and I’m nerding out on all of you who are listening today, so bear with me, but what I think is really…

I have one of those brains that I can’t get enough and I’m just so fascinated by this but what they’re finding is that it’s less of a respiratory disease and more of a blood vessel disease, which is why it is so devastating to the human body.

Gregg: I want to ask you one last question as we wrap this up, and that is if I had run into you before you or I had even heard of COVID. I asked you, “What’s the life of Patti Brennan like?” Then I asked you that question again today.

How has your life changed? What have you done to make yourself as safe as possible? What are you doing to optimize your life to get as much out of this period as you can, as unfortunate as the period may be?

Patti: It’s a great question, Gregg. Nobody’s ever asked me that. I would say that before all of this happened, I was one of those people who lived to work. I was nonstop 24/7.

I’ve frankly never admitted that until just this moment.

Gregg: We’re all shocked about it.

Patti: I know anybody was listening and it’s funny. I will also say that for me, even back then it’s never really felt like work. Although I was always focused on what do I need to do next? What email do I have to answer? Who do I have to call? We’ve got five meetings tomorrow. I got to prep for the meetings, etc.

My life was on that little bit of a hamster wheel, wasn’t a great delegator, and I would say that what’s different is that because we were forced – not kind of we were, we’re all remote, working from our homes – I’ve learned to delegate much better.

I’ve learned the importance of spending time with Ed and the kids. This summer has been crazy in that regard because I’ve been able to work not only from my home. We have a home down at the shore. I’ve been very effective working maybe at different times during the day, but my daughter has been there, she is also got my DNA, unfortunately for her.

The two of us have found this way of getting a little bit more balance. I think if you were to ask anybody around me. Maybe I’m a little bit more sensitive, almost to the fact that people have lives. I’ve always thought that I was sensitive but I’m really sensitive to the fact that people have challenges.

People who work for me, they’ve got young families, they’re trying to balance this whole thing. Several of my employees have parents that are living with them. With their own health challenges and a couple of my employees have just had children. I’m like, “Look, take care of your babies. Do not worry about this.”

I would say that’s probably…I will be honest with you. I’m not necessarily proud of that but it has forced me to be much more reflective of, “Yeah, this life is short, I haven’t sold my home like you guys have. We’re not moving anywhere.”

I do really appreciate day-to-day and the relationships, just the wonderful relationships, the friendships that I have with the people who help me to take care of all of our clients. I mean, we’re more than a team. This is a family.

In fact, tomorrow, I’m having everybody over, we’ll get beer, we’ll get wine, I’m like this is…Let’s just go and have fun together. That is probably the biggest thing that’s changed in my life.

Gregg: I want to thank you for this conversation today, for our friendship and our relationship on the whole. I have learned so much from you. I’m so grateful for it. I am so grateful for the opportunity to come and join you on your show. Thank you so much.

Patti: Thank you so much, Gregg Stebben. I’ll tell you what nobody but Gregg could get that information out of Patti Brennan. Thank you for drawing it out of me and helping me to recognize the impact of COVID on my life as well. That’s the beauty of a great friendship, isn’t it?

Gregg: Absolutely it is.

Patti: Just be able to talk openly, forget that there might be millions of people listening to this today. It’s just you and me. Perhaps if anything, you and I have given people the opportunity to do the same with people who they care about and love.

Gregg: Absolutely. Thank you so much, Patti.

Patti: Thank you and thanks to all of you who are listening today. You’ve been terrific. I so appreciate our relationship that has developed over the last year or so. You’re just amazing. I’m just so grateful that you take time out of your day to listen to our podcasts.

If you have any questions, feel free to go to our website keyfinancialinc.com. Until next time, it’s Patti Brennan from Key Financial. I hope you have a wonderful, wonderful day. Take care.

Ep55: The Federal Reserve – The REAL Driving Force in the Economy

About This Episode

The rising debt in our great country is almost $26 trillion! News noise will try and create fear in Americans because fear is a powerful motivator. Aren’t there negative implications for our families with numbers like these? The answer is simply, NO! To understand why, one also needs to understand the basics of accounting – assets and balance sheets. In today’s episode, I am continuing my conversation with my Chief Planning Officer, Eric Fuhrman. We define the relationship between the Federal Reserve and the Federal Government and offer some historical perspective with examples every listener can understand. Tune in to find out that this relationship is not as complicated as one might imagine. With the presidential debates coming in the next few weeks, this is the perfect time to learn and understand what these numbers really mean and how they affect our economic health and future.


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

Today, we’re going to be talking about the Federal Reserve and how the Federal Reserve works with the government. In our last podcast, we talked about the mounting debt that the Federal Government has accrued as a result of the stimulus programs that they’ve approved to get us through this crisis.

Now, I want to talk about how does the Federal Reserve work with the Federal Government to create stability and to grease the engine a little bit to make sure that there’s ample liquidity for our economy to continue to be able to function?

Joining me again is the professor, Eric Fuhrman. He’s our chief planning officer. A real student, he is amazing in terms of the depth of the research that he’s willing to explore a particular subject.

We’ve had a lot of fun – if you call it, Eric, fun – just getting our brains around how these two separate entities work together to get us through very difficult times in our nation. Thank you so much for joining us today.

Eric Fuhrman: Patti, thank you so much. I couldn’t imagine, I’ve been losing sleep over thinking about this day when we could come and talk about the Federal Reserve. National debt followed by the Federal Reserve, it doesn’t get much better than that.

Patti: You and me both. The reason I’m losing sleep is because we want to take a very complicated subject and boil it down into terms that people can wrap their heads around and understand a little bit.

Eric: Here’s the deal. It’s not easy, but we sure are going to try, right? We’ll give it our best, and that’s all we can do.

Patti: Absolutely. It is complicated, and yet it’s so important. Especially as we go into this election, you’re going to hear a lot of rhetoric, everybody, in terms of the debt and the Federal Reserve. We even heard about it a couple years ago in terms of “The Fed wasn’t doing its job,” yada, yada, yada.

It’s easy to play Monday morning quarterback. It’s easy to criticize. Yet, when you really think about what they’re doing and what they’ve already done, you begin to realize and recognize – at least I do and I think that, Eric, you probably show this – that the leaders in government and the leaders at the Federal Reserve, they’re really smart people.

There’s a method to their madness. There’s an important role that they both serve. They’re different roles. Last podcast we talked about the Federal Government, what they’re doing with all of this stimulus, why they’re accruing this debt, why it’s important for our economy.

Now, let’s talk about the Federal Reserve and how the Federal Reserve’s role is very different. Eric, let’s start there.

In February and in March, there were headlines. You may not have read it in the local newspaper, but there was a lot of talk in our circles about the fact that the markets were beginning to freeze.

Things were seizing. The spreads were widening and the demand for the debt, there wasn’t any demand, and the Federal Reserve needed to come in and save the day.

How does that work? Why did those things happen? Why is the credit market so important? What does that really have to do with the rest of the economy?

Eric: Wow, there’s a lot to unpack there. That’s why I said we might be here for the next 30 minutes just talking about this. Credit is the lifeblood of the economy. You have to have credit flowing through because that’s, ultimately, what keeps commerce going, keeps growth going, and everything else.

We want to basically dissect two distinct roles that the Federal Reserve plays in times of crisis. Many people are probably familiar with the term “lender of last resort.” In the modern economy, we have a very complex financial system. They have also become the buyer of last resort. Those are two different functions. Why don’t we talk about each one here a little bit?

Patti: It’s a great way to break it down.

Eric: Yeah, just easy, digestible pieces, two at a time. Let’s talk about the lender of last resort, explain that. All banks, they have an inherent mismatch in their assets and liabilities. What does a bank do? It takes in depositors’ deposits, which is a short-term liability for the bank because the depositors can show up any time and request their money, right?

Patti: Sure.

Eric: What does a bank do? It takes the savings and then extends loans to entrepreneurs and people that want to engage in commerce and build their business. Those loans are long-term assets. For the most part, they’re illiquid. They just can’t call a loan if they need to pay a depositor back.

Maybe a good little example, many people are familiar with the movie from many years ago called “It’s a Wonderful Life” with Jimmy Stewart. He played George Bailey. There’s a scene where George Bailey goes to the Bailey Brothers Building and Loan and he sees all the customers of the community outside. This is an old-fashioned bank run. This was staged in the 1930s.

Everyone was worried and wanted their money back and he tried to explain to them, “I don’t have your money. I gave a loan to this person and to that person and so you’re…”

Patti: Sure, this is how you bought your house and your car and this business. They’re the ones that actually have the money. We have some of it, but we don’t have all of it.

Eric: Exactly right. That’s the case he made, as impassioned as it might be, and they were unfazed. What did he have to do? He went and dipped into his anniversary savings, which was about, I think, it was $2,000 and he started giving depositors their money back.

In essence, George Bailey had become the lender of last resort. How does that apply in the real world? Think about the Federal Reserve. We have banks that are good banks, good collateral, but they might experience a liquidity squeeze, an event like, say, COVID or something like that, where all of a sudden, people are running to the bank to get their money out.

What the Fed does through what’s called the discount window is that they step in and they will provide collateral or loan on banks that have good standing and good collateral to help them through that liquidity so they don’t fold and don’t have to sell assets in a fire sale.

Just to give you an example of how effective this is, in 1933, there is estimated over 4,000 bank failures occurred then. 2020, we’ve had two so far.

Patti: Wow.

Eric: In the last 20 years, I think we’ve only had about 559 bank failures that have happened right. That’s how they act as the lender of last resort, to loan on good collateral, to make sure those institutions stay solvent and don’t collapse when they have an unexpected run on deposits.

The other one is to basically operate as really the buyer of last resort and this is a new way to think about it. You talked about the credit market seizing. What does that look like?

Think about any financial transaction. There’s an ask, what someone wants to sell something for, and then there’s a bid, what somebody wants to buy it for. When you have a seizure of the credit market, there are no buyers. No one’s going to step in and buy it.

Essentially, the market dries up. There’s no liquidity. There are no trades being made at any price because the buyers are worried about the counterparty, the risk, and so forth.

Patti: Why is the liquidity so important? We’ve got to get down to the baseline of what debt represents. You basically have a bond or you have a loan. You want to sell it to get the cash, but nobody wants to buy it. The liquidity part is you need cash. You can’t live on a bond.

You need to live on money, but if nobody’s willing to buy it, what are you going to do? You’re going to lower the price, yada, yada, yada, or as what happened earlier in the year, there wasn’t anybody that wanted to buy it. No ifs, ands, or buts. That’s where you really get into a very difficult situation.

Eric: Yeah, and that’s what we saw earlier this year. Even the treasury market, one of the deepest liquid markets in the world, started to seize up spreads. The bid and ask started to widen, which creates a liquidity problem.

What does the Fed do? The Fed has an awesome, awesome power. They have monopoly over money creations.

Patti: They’re the Wizard of Oz, Eric. I just thought about that. You got the Wizard of Oz, Jerome Powell. He’s got the little curtain thing going on and he just pushes a button, doesn’t he?

Eric: Yeah, well, that’s probably the best way to describe it, right? They can literally conjure money into existence with a stroke of a key on a keyboard. They have infinite capacity to create money.

The idea is that their activities and the market are really supposed to be short-term. These are not long-term participations in the market. They want market forces to figure out the allocation of resources.

In times of trouble, the Fed will go in and set a floor for bonds. Call it municipal bonds. They have committed $500 billion to buying municipal bonds in this new facility that they have this year. They’re putting a floor on it.

Patti: The reason for that is because municipalities are running into their own liquidity crisis because municipalities have services that they need to deliver, but they’re not getting the taxes because people are unemployed. It’s a vicious, vicious cycle.

That plus the fact that people don’t want to buy municipal bonds because they recognize that the municipality is having some financial trouble and they could default, which many municipalities have defaulted over the years.

Entire states have done that. Now, you’ve got a government service or a government entity that is there to provide services and they have their own form of debt and nobody wants to buy it, so who comes in to buy it but the Federal Reserve. The Federal Reserve gets the bond. The municipality gets the cash to conduct their services.

Eric: Exactly right. There are criticism like, “How far do you go?” At what point is the Fed engaging in what you would call moral hazard? If the Fed exhibits this precedent for stepping in and solving these problems, as they did in 2008…Remember, they took equity stakes in companies like AIG and things like that.

The argument is, and this argument is even made for FDIC insurance, if there’s going to be this backstop, this implicit guarantee that the government will save us, then what are you doing? You’re encouraging bad risk-taking behavior because the government’s going to step in and save us.

That’s a fine line, probably well beyond this podcast, maybe another podcast. Join us next season where we’ll entertain this topic. It is a legitimate question, but I think the Fed is doing this on a short-term basis to arrest the decline, the collapse, and the financial crisis in the economy.

Patti: You mentioned short-term basis. Let’s go back to 2008 and 2009. Up until then, when you look at the Federal Reserve balance sheet, all that was on it was the currency. In 2008 and ‘09, they went into some of these other programs, the QE programs, where they started to buy the Treasuries, the munis, and the mortgages that nobody else wanted.

Now they have these assets on their balance sheet. Over time, the goal was to reduce their balance sheet and go back to where they were before the crisis, but they never got there. Now here we are in 2020. Is that something we should worry about? The Federal Reserve balance sheet, it’s probably going to double by the time this is all done.

What happens in that scenario? We’ve doubled the Fed balance sheet. It now owns these loans, these bonds, etc. How does that work?

Eric: That’s an interesting point. The point here is their operations that they’re conducting are meant to be short-term. They don’t want to create dislocations in how private individuals decide how to allocate resources.

But you make a good point. Prior to 2008, the Fed’s only liability was currency in circulation. These are coins, dollars, and stuff like that. That’s a liability of the Fed.

2008 was extraordinary because now they started ramping up Treasury bonds, mortgage-backed securities, all these other things. Effectively, what happens when they do that is they print money. They’re conjuring money into existence. Where do they get the money to buy $10 trillion of bonds? $10 trillion’s an extreme example. A keystroke, right?

Patti: Right.

Eric: They create the funds, they deposit the funds in the bank or whoever would sell them the bonds, and they inject cash into the system. The concern is that this is money-printing. It’s going to lead to inflation.

Patti: Let’s stop right there. It would be reasonable for people to say, “Hey, that sounds pretty good. You just create a lot of money, you put it into the system, everybody’s that much richer.”

The issue with inflation, of course, is that’s fine and dandy, but if you have a lot of dollars, and the same amount of goods and services are in the economy, you’ve got too many dollars chasing too few goods.

What happens to the price of those goods? They go up. “Hey, you know what? You really want this loaf of bread? OK, it’s 10 bucks because there are a lot of people that want this loaf of bread.” It is in a really interesting phenomenon. The Federal Reserve can’t really, or shouldn’t really, just print money out of the blue. Yet, to a certain extent, it has done a little bit of that during this crisis. Go ahead.

Eric: I was going to say what’s interesting about that is you make a great point. If there’s more money…I think it was Milton Friedman who said, literally, “If things were really bad, just drop bails of money out of helicopters on people to just try and create some inflation.”

What you’re saying is correct. If the money supply doubles but our output can’t increase, then you’ve got more money chasing the same quantity of goods, and basically inflation goes up.

The unique part, there’s a lot of criticism of what the Fed did in 2008. It was unprecedented, and there was this notion that it was going to create runaway inflation.

The important distinction is the Fed has created additional money in the system, but that money is locked up in the banking system as excess reserves. This money is not entering the real economy. What the Fed is really trying to do is to set the conditions for growth, set the conditions for people to come back to the table and borrow.

You don’t have inflation until you have the credit creation process. Banks have to use those excess reserves to then make loans. Then the money enters the real economy. If loan growth doesn’t happen, the Fed can do all they want. We used the term in the last podcast about “pushing on a string.” They can only do so much.

The conventional thinking is that if you lower interest rates, the price of money, that will increase demand. But we’re finding out that there’s some situations where it doesn’t matter. Even at negative interest rates, there are no borrowers to come to the table.

Patti: That is, again, getting back to the human element of all of this. Remember, we are an economy that is basically people and owners of businesses. When you go through economic contraction, unemployment goes up.

It’s human nature to say, “You know, I’m not going to spend as much money. I don’t want to borrow money. I don’t want to get a home equity line of credit to do this renovation because I’m worried about my job or I’m worried about paying it back,” so they don’t do those things.

Getting back to the prior podcast, one person’s expense is another person’s income. Very basic, so important, one person’s expense is another person’s income.

If that person isn’t doing the renovation, the contractors aren’t earning an income. The companies that make the power tools that they would use for the renovation, they’re not getting an income and creating jobs within their company.

Commerce has this domino effect. It’s referred to as a multiplier effect. A dollar can multiply in terms of benefit for many. If everybody’s pulling back and it’s locked up – or as you say, trapped in the banking system – then it doesn’t have the opportunity to have that multiplier effect.

If, on the other hand, businesses or people go out and get the money that they may not have themselves through a loan with the promise to pay it back, then they get that chunk of money, and they do whatever it might be. Whether it be to start a business or pay their employees, it has a really important function.

If, all of a sudden, the demand for that loan, the demand for all of that rises tremendously, that means that spending has risen tremendously.

That’s where inflation can be the likely outcome because there’s so much spending, there’s so much pent-up demand that everybody is going out and buying all of this stuff.

If you’ve got the same number of companies, or even worse, if companies have gone out of business because of a crisis and there’s not enough entities to produce the goods and services that people want and need, then inflation can become even a bigger issue.

It is interesting how the Federal Reserve works to provide that floor so that people can have access to money if they need it.

Back to the 2008 and 2009, and you and I saw this very clearly with some of our business owners, a lot of them were having trouble getting the loans from the banks. The banks got really paranoid because the banks were criticized because all lending standards seemed to have gone out the window during the 2000s, which created a problem for the banks.

The stability of our banking system, not only here in the US but on a worldwide basis, got in question, so the banks said, “OK, we’re not going to be as freewheeling with our lending,” and so businesses were having difficulty, people were having a really tough time getting mortgages, and that dampened the recovery in a really big way.

Inflation never showed up because the banks didn’t lend it out as much as you would expect after a crisis like that.

Eric: Yeah, you have them pulling back credit lines or increasing underwriting standards so they only lend to the most sterling credit available in the market. All those things happen and that puts a dampen on demand. You have to have people spending in a big way to have inflation show up.

Patti: I think it’s pretty interesting that in this particular crisis, what they’ve done is, they’ve really gone gangbusters.

Federal Government as well as the Federal Reserve are getting so much liquidity into the system, whether it be through some of the programs like the unemployment benefits and things of that nature, or the PPP loans to keep businesses solvent, to give them a bridge so that they don’t have to let people go, creating another domino effect.

Again, the hope is that because of that, these businesses remain solvent so that banks feel comfortable to lend the money to these entities, so that commerce and this wonderful thing called the US economy could continue just going back with great output.

Eric: Absolutely. I think an interesting observation too, there’s a lot of worry about inflation and what the Fed is doing, but you and I as financial professionals, you look to the market for signals, what does the market tell you?

As much press as the stock market gets due to its capricious nature from time to time, the bond market is far larger than the stock market is. The credit markets are much bigger, and when you think about any corporation, bonds and credit have a senior claim on the assets. Equity is at the very bottom, which is why it’s so volatile.

Ultimately, you look to the credit markets, right, Patti? We look to the credit markets for what are the telling us because in essence, they are senior to equity claims, so a healthy credit market gives you signals about where the economy and the stock market may go.

When you think about inflation, we can observe Treasury Inflation-Protected Securities, also known as TIPS, and what are they telling you? They’re negative.

We don’t have negative yields in government bonds like you would in, say, Germany, or Japan, or the UK, but the Treasury inflation-protected securities are negative yielding, and that tells you the problem is not inflation. It’s deflation.

Patti: That is a serious problem.

Eric: Yes, that is far more devastating. Thankfully, periods of deflation in our country have been far and few between over the last 80 to 90 years, but that is something that is far more of a greater danger than, say, two or three percent inflation.

Patti: Just to explain what deflation is, now, you have more goods and the people don’t want, so it’s the opposite effect, and that’s one thing. Now, you’ve got to factor your warehouse filled with a whole bunch of stuff, and it just sits there and it’s unproductive. It’s not creating income for employees and things of that nature.

I think also equally as important is that if somebody has a loan, paying back that loan becomes that much more expensive, right?

Eric: Yeah, and I think that’s a great point. Your very visual point about inventory just sitting on the shelves and piling up, what’s driving that? It’s because in deflation, prices are falling. People defer consumption.

If you’re sitting out to dinner with your sweetie and you’re like, “Well, why buy the steak now? If I wait 10 minutes it’s going to be cheaper, right? I’ll just wait. I’m going to defer.” That has a very pernicious effect throughout the economy. People delay. That ends up in people getting laid off.

For those that are working, if you see your wages slashed, the point that you just made, your income is going down because of deflation, but your debts have not changed. The mortgage, principal, and interest is still the same, and then that’s when it leads to bankruptcies.

Patti: That’s a very difficult situation, and that’s to a certain extent what Japan has been going through, a period of deflation. Japan is a nation of savers, not spenders. It’s locked up in their banking system and it’s gone on so long that it’s going to be very difficult for them to get out of it.

The government didn’t step in as our government did, whether you agree with where they put it or not, to really stimulate demand, to get out there and just get that inventory off the shelves of the warehouse, so that the businesses can stay and keep their employees and to prevent this thing called deflation, which is a much more difficult economic issue for a Federal Reserve to solve.

Eric: Yeah, and it’s interesting too, we love the idea of low interest rates, cheap credit. It’s great. It allows us to do more things than we thought possible when your mortgage is three percent versus eight, but you remember, we look at long-term interest rates in 1981, and where were they? 13 percent.

Interest rates have been falling for the last 40 years. That is a sign we’re having trouble with inflation. It’s deflation that’s taking over. There’s various debate on why that is, or what the endgame will be. Low inflation is very good, but deflation is definitely a bad thing.

Patti: A lot of the argument or the theory is that technology has really helped us to improve productivity and keep the cost. Every time you go out, the cost of the TV is getting cheaper and cheaper for a better TV, things of that nature.

Not everything is going down in price. Some things are still going to inflate. Services tend to inflate faster than goods. You’ve got tuitions, and medical care, and things of that nature continue to go up.

Just as an economy in general, you want to have that balance where prices don’t go down and peoples stop spending money and, now all of a sudden, paying back that $100,000 or $500,000 mortgage. Wow, that’s stayed the same, and it’s going to be harder and harder to do that.

Eric: Absolutely.

Patti: As we think about what the Federal Reserve does, now it’s creating a lot of money. It’s got these assets on the balance sheet. First question is, OK, well, these assets on the balance sheet happen to be treasury securities, mortgages, etc.

The Federal Reserve is a separate entity. To me, again, I’m nerding out on you, Eric, and I’m nerding out on all of you who are listening today, so bear with me, but what I think is really…

Eric: This is a behind the scenes. This is the best part of Patti, by the way. When Patti nerds out, it’s everybody’s favorite moment of “Key Financial.” I just want to let everybody know, because they don’t always get to see it all the time…

Patti: Totally, totally, totally.

Eric: We love when Patti nerds out.

Patti: Oh, man, what was I just going to say? I was about to nerd out, and I forget what I was nerding out about.

Eric: Oh, no.

Patti: Basically what the Federal Government does is, it’s a separate entity. It has to manage its own finances, so it’s got income. It’s got where it gets its income, which is basically the interest on the assets on the balance sheet. It’s got its own sets of expenses, and over the last 10 years, it’s had a surplus. What does it do with the surplus?

Under federal law, the Federal Reserve must pay that surplus back to the treasury. Last year, it was $55 billion. In 2015, it was $117 billion. In effect, while they work separately, the Federal Government is actually benefitting from what the Federal Reserve is, ultimately, doing.

Eric: I feel like I wish I would have thought about this in our last podcast, but I feel like the tag line for both of these is follow the money. When you’re thinking about debt, you’re thinking about all of these things. You have to think about the stages that the money goes to that really cement, solidify the understanding.

You’re right. Think about it. The Federal Reserve, from our last podcast, I think you said it owns 21 percent of the US treasury debt out there, so they receive the interest income. As you said, they use that to cover their own expenses of the various Federal Reserve banks, but the surplus, by law, has to be remitted to the treasury, back to the government.

In essence, when the Federal Reserve buys bonds, they are effectively providing interest-free financing to the government in one way, shape or form, because the government taxes us for the interest. Simply, they buy the bonds and then they remit that back to the treasury. I wish I could get that deal because it’s not too bad.

Patti: You and me both.

Eric: It’s not bad. By the same token, I don’t think people should take that as though there’s something surreptitious going on here. It’s just a function of how the system works. The money has to go somewhere.

Patti: Again, to go back to the previous podcast, again, using the Abe Lincoln quote from the “Gettysburg Address,” the government, meaning the Federal Reserve and the Federal Government, it is basically a body of the people, selected by the people, for the people, so that’s a really important concept.

Then again, as we said last time, as we go into this election, to remember the principles of what our government and what our founding fathers intended, take away personalities, whether you like them or not, understand their role, and how all of that works.

Eric: I think that’s such an interesting point that you break up. I love that quote from Abraham Lincoln and we used it in the last podcast, but it’s so interesting, when people think about government debt, and they always say, “Well, this has got to be paid back. How are they ever going to pay it back?”

They’re going to pay it back to you, the American people. They borrow the money from you. We’re borrowing from ourselves, and we owe the money to ourselves, so we’ve got to pay it right back.

Patti: The simplest example of that is, and again, we’re off topic, but that’s the way we always do these things.

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

Patti: We’ll wing it. You think about it, think about World War II and the War Bonds.

The War Bonds were issued to finance the war because the Federal Government needed cash, and so it went out to the United States citizens and said, “OK, we’ll give you this war bond to finance the war.”

Let’s say that it’s May, “I’m going to give the Federal Government. Yeah, of course, I want to support my husband who happens to be overseas fighting for our country. I want him to have the best supplies. I want him to do that. Here’s $10,000 to finance the war.”

The government says, “OK, great, Patti. I’ll pay you the interest, and they take the $10,000, and they buy supplies.”

I never thought about this, Eric, but they bought supplies from my grandfather’s company. He had a big company, big company, I don’t know, hundreds of employees. What they made, my grandfather was instrumental in this thing that we refer to now as gauze. His company manufactured bandages, gauze.

The Federal Government took my $10,000 and used it to purchase gauze from my grandfather’s company. That gauze went back to the Federal Government. It was sent over to my husband who was wounded. By the way, I was working in my grandfather’s company so I got a salary from my grandfather, and I went and spent the money.

It’s the way that the money works all-around within a system to keep everybody afloat, provide the goods that are necessary, in that case, to provide our servicemen, the people willing to go over there and defend our nation and Europe in World War II.

What’s a little different now, fast forward, is that there’s an extra entity out there buying those bonds, and that’s the Federal Reserve.

During February, you know what, this is all fine and dandy, but I don’t want your bonds. People didn’t want them. The market froze.

That’s where the Federal Reserve came in and purchased the bonds, gave the Federal Government the cash to provide higher unemployment benefits, the PPP loans, etc. Yes, again, because it’s a liability, it’s debt, it’s debt that it owes now to the Federal Reserve.

Again, we’re trying to boil this down and bring this down in a way that, hopefully, it makes sense for all of you and to give you a sense of it’s not hocus-pocus here. There’s a real reason why these things are happening. It’s exactly why the government, any government, really exists. It’s to support its people during very difficult times. They do that in the ways that they’re doing with this.

For everybody listening, for all of you listening, it’s also important to understand the role that the Federal Reserve plays versus the government.

Eric, why don’t you talk about the Fed being that, providing the floor, but we still need the government. Right? What is the difference? The Federal Reserve is there to provide that liquidity, that relief, but they can’t stimulate the economy.

Eric: That goes right back to a very interesting discussion of fiscal policy and monetary policy that sounds like that. It looks like that. I think that’s where we’re going, right?

Patti: You got it. Go for it.

Eric: There’s two different policy tools here. The Federal Reserve is really in charge of the monetary policy. They’re given several mandates by Congress to promote full employment, stable prices, but also to support the smooth functioning of our economy.

They use interest rates to try and manage and maximize employment and borrowing costs, which is a tricky thing to do. They’re using data that’s already happened to try and see where the puck is – a wonderful analogy that I’ve heard you use many times. It’s a difficult job, and they don’t always get it right.

What’s interesting is that they have learned from the past. They have learned from their mistakes.

Central banking monetary policy is something that really continues to evolve. The things that are happening today were really forged in the depths of the financial crisis by Ben Bernanke, the former chairman. These are all new tools and things that really didn’t exist prior to that point. It will continue to evolve.

Ultimately, they’re there to provide that stability and prudent management of the financial system. Where the government steps in, they make policy decisions about what services, what kind of things do we provide, what kind of investments do we make for the country whether it’s roads, and bridges, and different infrastructure.

The infrastructure, ultimately, that makes us more productive. If we’re more productive in the future, we have higher standards of living because we’re producing more for a better cost. They’re really in charge of figuring out how to structure those safety nets, how to allocate the big, big things that an individual or a private company just couldn’t do.

Did they get that right? They are not beyond criticism of not doing this right. Ultimately, they get most of it right. That’s what they’re there to do is really to provide and direct those funds into investment and support and to do big things.

Patti: The bottom line to this is the Federal Reserve can print money till they’re blue in the face. Again, they’re not really printing it, but they’re using their operations, etc. They can print money till they’re blue in the face, but if it’s not lent out, it’s not going to do any good.

You need that demand. If the demand isn’t there from you and I, from the consumer, then the government steps in to create the demand where it doesn’t exist during a difficult period in our economy.

Eventually, hopefully, the consumer comes back, and some of those programs, whether it be the public-private partnership with pharmaceutical companies, the Federal Government is giving money to the pharmaceutical companies to find this vaccine, things of that nature.

Eric: That’s a reoccurring point that we just want to keep reinforcing and continue to echo this notion that we’re a market-based society. We believe that individuals make the best decisions to allocate resources, and own property, and make those decisions.

Occasionally, the business cycle’s volatile. Those things break down. People don’t spend.

What we’ve learned from the past is what you’re saying. The Federal Reserve can only do so much to create an environment where the economy can come back.

Many times, there’s a responsibility on the government to step in and extract that money, tap into that pool of savings from the private sector, households and businesses, to pull that money out and then spend it in a real economy when those private individuals are not spending.

That, ultimately, helps us get through these crisis and hopefully sets the foundation where we can grow again and hopefully not experience significant, significant difficulties that just persist on and on for years.

Patti: Again, and when you refer to that, you’re talking about GDP. When we talk about GDP, the goal here, assuming that we’re still in this recession, is to get out of the recession. A recession is defined as two quarters back to back of negative GDP where you’re not growing. You’re actually contracting. They want to get us back growing again one way or the other.

When you hear about these terms like a V recovery, or a U, what have you, a lot of times, these commentators, they confuse the economy with the market. They are two separate entities. I cannot emphasize that enough. Yes, the market is on a significant upswing, but we’re still, from an economic perspective, we’re trudging though. We’re still in this recession.

That is not unusual. The market is a forward-leading indicator. It is taking a look at the amount of money that is now sloshing into the system, and it believes that, eventually, we’re going to come out of this. The market is hoping we’re going to come out of this sooner than anybody every realized or anticipated.

That’s where you’re seeing a lot of this upward volatility, and the market is recovering and doing quite well when the economy really isn’t. Again, not unusual. That’s the way it typically happens.

Eric: It’s important, too, to remember that the stock market is not the economy.

Ultimately, publicly-traded companies have advantages that do not exist for the majority of employers, which are small businesses, which they don’t have access to the credit lines. They don’t have access to the capital markets to sell debt or issue equity to see them through. They don’t have the diversity of revenue streams that businesses do. The stock market is distinctly different.

A lot of people ask the question how can the stock market only be down a couple percent when we’re mired in probably one of the most severe contractions we’ve seen almost ever. It’s a different kind of thing. The support that’s going on, that’s certainly helping the stock market, but it’s really aimed to help some of these small businesses and people that are hurting out there for the most part.

Patti: Excellent. I’m just going to go through just a couple of, few concepts, and then we’re going to wrap this up. What is it, Eric, when they talk about monetizing the debt? What does that really mean in English?

Eric: It almost sounds like a dirty word, doesn’t it?

Patti: It does.

Eric: Monetizing the debt, it’s just some kind of negative, devious thing that’s going on there.

Patti: Again, it’s this Wizard of Oz thing behind the curtain.

Eric: Basically what monetizing the debt is, that’s literally if the Federal Reserve wants to influence interest rates, what do they do? They go to the New York Fed, and they tell them we’d like to buy $50 billion in Treasury securities.

They, with the stroke of a key, they create the money. They literally conjure it into existence, and they buy the debt. They’re monetizing debt in that they’re buying debt and they’re just creating the money out of thin air literally, and that’s what it is.

Patti: Over time, that helps in terms of they continue to do that, they monetize the debt. 10 years from now if they continue to do that, that creates some inflation because you’ve got more dollars circulating in the system, so the cost of paying down that debt is a lot less.

Eric: It goes two ways too. Remember that the Federal Reserve is trying to just create the conditions. They can monetize the debt, but they can also demonetize the debt.

If they want interest rates to rise, what do they do? They sell the treasury bonds they own on the balance sheet to the banks, and they extract cash out of the system and that cash doesn’t go back to the Federal Reserve. It just disappears out existence. It can really go both ways. They can monetize, they can demonetize the debt.

Patti: That’s how they control inflation.

Eric: Right. They look at inflation and then they try and control interest rates based on where inflation would be. They don’t want it getting out of control and so forth because, ultimately, businesses and consumers can’t make decisions if prices are going all over the place like they did when we had the gold standard.

Patti: One last question. When you think about the Federal Reserve, they’re printing these dollars and that’s circulating in our system. We talked about this a little bit, but for those people who weren’t able to listen to the last podcast, why is it that the US dollar is considered the reserve asset for the rest of the world? Why is that? What does that really mean?

We talked about this before. We can only do it on the surface, or we can go real deep and talk about Bretton Woods and the gold standard, and that kind of stuff.

Eric: What door do we go through, Patti? Do we go through door number one, or just we see how far the rabbit hole goes?

Patti: The simple answer, if I may answer my own question, is to say it’s not really the reserve currency. It’s the reserve asset.

The United States, the treasuries, and the dollar is the most liquid, transparent, largest entity market of anything. It’s a very reliable asset to hold, or in this case, dollars, and other countries peg their currencies to something that is so reliable, right?

Eric: Right.

Patti: Go ahead and go into a little bit about how that all happened.

Eric: I think the dollar supplanted the British pound after World War II, but people may have heard of this. Basically, the Bretton Woods Agreement, this was the Bretton Woods Conference that was conducted in New Hampshire.

In the post-World War II environment, the major economic powers, our allies, got together in New Hampshire and they forged the framework for what the new international monetary system would look like.

We have to remember that the United States, at that point, was the lone superpower, after having vanquished two foes on the Atlantic and on the other side of the Pacific, but the United States was the largest creditor nation in the world.

We had accumulated the largest stock of gold reserves in the entire world by far. Our allies in Europe had devastated economies and they had to rebuild those economies, and they needed dollars to be able to import food and energy to start building up, and so forth.

The intent of the Bretton Woods was to establish the dollar, because we had the most gold, as the world reserve currency that all other nations would peg their currencies to, but the idea was to overvalue the dollar, undervalue the foreign currencies so we could create a trade deficit.

Foreign countries, our allies, would run trade surpluses with the United States because their currencies were systematically undervalued. That would provide them the means to accumulate the dollars to then…

Patti: Get the goods and services.

Eric: …import the basics of life, food, energy, all the things that you need.

That established the marker in history where we went from a creditor nation to what we would call a debtor nation, and now we always get talked about that we’re the greatest world’s debtor nation ever, separate podcast, by the way. We’ve got lots of good ones coming up…

Patti: Absolutely.

Eric: …is what is what I’m getting at with this, but that’s where it established that. What happened is that gave them the ability to start to rebuild their economies and so forth, so that’s where we became the world reserve currency, was after World War II, because of just the favorable conditions in our economy.

Things have changed over time that, eventually, we were seeing massive outflows of gold. I think it was 1971, Richard Nixon called a gathering of his top advisers and Camp David and they said, “That’s it. We’re going to suspend the convertibility of the dollar into gold.” Now, we have what we have today, which is a credit-based system, based on what they would call fiat.

Now, rather than countries getting gold when they run a trade surplus, they accumulate dollars.

Patti: Simple.

Eric: Yeah, easy.

Patti: Easy, and then basically, like we said in the last podcast, they’ve got a number of different choices on what to do with the dollars because they can’t spend it in their own economy, because that’s not their currency.

Very briefly, they hold the cash, but then that’s dead money. They can spend it in the United States by buying our goods. That helps our economy because now they’re buying our stuff, and that gives our employees incomes, things of that nature.

They could invest in the United States. BMW can build a plant down in South Carolina and use dollars to do so, or they can convert the US dollar into a different currency.

Instead of holding dollars, they can convert that into euros, but now they’re back to the same problem. Now they own euros. Euros, great nations, wonderful, but they’ve got a whole separate issue in that they have one monetary system but they have different fiscal systems. Germany is different than France, etc.

It’s not a united framework as we have here in the United States, so I think that most nations prefer not to hold the euros because it’s less reliable in that vein, so what do they do? They buy US treasuries, and that’s basically what they do. They give us those dollars, and we pay them the interest on the treasuries.

If they want their money back, if they want to sell the treasuries, that’s fine, but if they do too much of it, what happens to the value of the dollar? It goes down. They’re shooting themselves in the foot.

Eric: Right, because then our exports become competitive, right?

Patti: Right.

Eric: You make an interesting comparison to Europe, how they’re set up versus us. We have the benefit of a fiscal and monetary union across all states in the land.

Could you imagine if suddenly Texas, or Idaho, or whoever, wanted to suddenly have their own currency? This was problematic back in the Civil War, but that’s one of the advantages that we have.

I think part of what does not fall into the public discourse that I think is a disservice is, there’s so much focus on the trade deficit, this imbalance between what we export versus what we import, and that’s in the headlines and so forth.

What is missing is, the trade deficit is part of what we call the current account, but every nation has what they call a balance of payments, hence the word balance. If you have a deficit in one area, so a deficit in your trade account, you have to have an equal and corresponding surplus in your financial account.

When we run a trade deficit, that can have negative effects in certain segments of the economy, but it also means that we’re importing capital from abroad, so we’re creating a source of funds in the financial account.

Patti: That’s exactly right. You have the dollars here.

Eric: I would say, every time you hear about the trade deficit, just remember that is just one component of a broader set of what we call the national accounting identities, which is the balance of payments. The system has to balance. If there’s a deficit here, there’s got to be a surplus somewhere else.

Patti: You know, Eric, it’s exactly what we were talking about last time. We hear so much about the debt in the United States, and this rising debt of $26 trillion. You never hear about the assets. It’s balance sheet. It’s accounting 101. There’s got to be assets, and we happen to be the wealthiest nation in the world.

Americans hold $117 trillion worth of assets. That doesn’t even include what the Federal Government holds, and the state governments, with the land, and buildings, and things of that nature. There’s assets, pick a number, $140 trillion, $150 trillion with a T dollars, to offset the $26 trillion that we owe, frankly, to ourselves.

Eric: It’s interesting. The numbers are pretty big, but that again, which I was really excited about this series of podcasts because I just feel like so much when you talk about it or if the topic comes up, is that people only focus on the liability.

Nobody ever asks the question about assets. I’ve never heard anybody say that, and that’s so fascinating to me, because it would certainly put things in context if you thought about the assets.

Patti: Here’s the deal, Eric. They wouldn’t get elected, because fear is a powerful motivator. People don’t want to think that we’re going to have so much debt, and the implications for our families and things of that nature.

I hope it’s been helpful for everybody who’s listening. I find it fascinating. Thank you so much for all the research and your contribution, professor, and thanks to all of you for joining us.

I hope this was helpful. I hope that we were able to boil a very complicated subject into fairly simple terms, and maybe restore a little bit of confidence in the system that we call the United States of America’s economy, and the leadership, and how some of this stuff can work.

Pull back the curtain, simplify it, to help you to understand that there’s really a reason and there’s a method behind everything and a lot of the decisions.

Again, we may not always agree with them. We can go on and on about how the money is being used and is it frivolous, but the intent is to keep this wonderful economy in the United States growing. We stabilize it first and then we return to the growth that has really made our nation what it is today.

Thank you so much for joining us. I hope you found it helpful. Go to our website. Listen to the other podcasts. Definitely, please let us know if you have any questions, if you want to talk about this further one on one, that’s what we’re here for.

As you think these things through, always remember, we’re here for you. Thank you so much for joining us. Thank you, Eric, for joining us. You’re terrific and I hope you all have a terrific day.

Ep54: The Government Deficit – What the Numbers Actually Mean!

About This Episode

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


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

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

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

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

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

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

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

Patti: Hopefully not.

Eric: We try and make it exciting, right?

Patti: Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patti: There you go.

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

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

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

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

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

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

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

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

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

Eric: Judiciously.

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

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

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

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

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

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

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

Eric: Right.

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

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

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

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

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

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

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

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

Patti: Exactly.

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

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

Eric: Yes.

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

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

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

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

Patti: Which is why GDP is the measurement.

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

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

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

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

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

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

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

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

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

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

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

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

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

Eric: Yeah.

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

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

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

Patti: Ooh.

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

Patti: That’s interesting.

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

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

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

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

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

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

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

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

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

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

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

Eric: Yeah. Sure.

Patti: Let’s just do this.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patti: Oh, absolutely.

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

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

Eric: I mean, come on.

Patti: Yeah. Why not?

Eric: It’s like a pastime, right?

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

Eric: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What have I missed?

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

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

Eric: Yup.

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

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

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

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

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

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

Patti: Widgets.

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

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

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

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

Patti: Perfect example, exactly.

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

Patti: Exactly.

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

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

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

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

Patti: Yeah.

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

Patti: It’s dead money.

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

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

Eric: Demand for our assets, right.

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

Eric: Right.

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

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

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

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

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

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

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

Patti: They don’t want that either.

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

Patti: Right. That’s interesting.

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

Patti: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eric: Did we just fall into that? Oopsie.

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

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

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

Eric: Right.

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

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

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

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

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

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

Patti: Exactly. [crosstalk]

Eric: They got to wait six months.

Patti: This is the finale.

Eric: That’s right.

Patti: This is the season finale.

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

Patti: Exactly.

Eric: The anticipation, central banking, lookout.

Patti: Oh, my goodness.

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

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

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

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

Ep53: REBROADCAST: Life or Death Emergency Preparedness – What to Grab?

About This Episode

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

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

Ep52: Asset Allocation Strategies That Work!

About This Episode

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


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

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

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

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

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

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

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

Patti: It’s so much fun, isn’t it?

Sam: It is.

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

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

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

Sam: Yeah, it’s true.

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

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

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

I’m sorry, Sam. I interrupted you.

Sam: Oh, no. It’s…

Patti: Tell me more about that ride home.

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

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

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

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

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

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

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

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

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

Sam: Sure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sam: Absolutely.

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

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

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

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

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

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

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

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

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

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

Patti: Zero?

Sam: Never.

Patti: Never?

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

Patti: That is wild.

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

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

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

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

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

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

Sam: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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

Sam: Greatest thing, right?

Patti: Yeah, latest, greatest thing.

Sam: Bitcoin, here we come.

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

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

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

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

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

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

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

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

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

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

Ep51: The COVID Economy and The COVID Market – Not the Same!

About This Episode

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


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

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

Brad, welcome to the show.

Brad Everett: Thanks, Patti.

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

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

Brad: Sure.

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

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

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

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

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

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

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

Brad: Google.

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

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

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

Brad: 35.7% per year.

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

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

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

Brad: 3.48.

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

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

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

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

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

Brad: Sure.

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

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

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

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

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

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

Brad: Sure.

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

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

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

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

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

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

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

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

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

Brad: Sure.

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

Brad: Right.

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

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

Brad: A better entry point.

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

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

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

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

Brad: Right.

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

Brad: Right, sure.

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

Brad: Right, exactly.

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

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

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

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

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

Patti: Isn’t that amazing?

Brad: Yeah, incredible.

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

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

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

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

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

Brad: Sure.

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

Brad: Right.

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

Brad: Sure, absolutely.

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

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

Brad: Right.

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

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

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

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

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

Brad: That’s just this year.

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

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

Brad: Right.

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

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

Brad: Sure.

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

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

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

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

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

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

Brad: Sure.

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

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

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

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

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

Brad: [laughs]

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

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

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

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

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

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

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

Brad: Yeah, you have to pick something.

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

Brad: [laughs] Right.

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

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

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

Brad: I think that’s a fair bet.

Patti: What do you think? OK.

Brad: I would take that.

Patti: TINA is alive and well.

Brad: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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

Let’s talk about bonds.

Brad: Yeah.

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

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

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

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

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

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

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

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

Brad: Right.

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

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

Brad: Right.

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

Brad: Because bond yields are so low.

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

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

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

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

Brad: Keep selling stocks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brad: Right.

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

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

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

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

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

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

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

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

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

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

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

Brad: Absolutely, yeah.

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

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

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

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

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

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

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

Patti: What they can get.

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

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

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

Brad: Exactly, yeah.

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

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

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

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

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

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

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

Brad: Sure.

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

Brad: Thanks, Patti.

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

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

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

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

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

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

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

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

Ep50: THE ONE Strategy to Implement When Young

About This Episode

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


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

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

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

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

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

Maddie, thank you so much for joining us today.

Maddie McTigue: Thanks for having me, Patti.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maddie: Yes.

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

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

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

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

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

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

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

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

Maddie: I don’t think many right now.

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

Maddie: Yeah, definitely.

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

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

Patti: $787,000.

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

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

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

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

Maddie: $366,000.

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

Maddie: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ep49: The Most Common Retirement Mistake

About This Episode

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


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

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

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

Sam, welcome to the show.

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

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

Sam: Sure have, yeah.

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

Sam: Sure.

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

Sam: All right, let’s do it.

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

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

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

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

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

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

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

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

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

But you know what I mean.

Sam: Yeah.

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

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

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

Sam: Absolutely.

Patti: Tell me more about that.

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

Patti: Right. How often does life run smoothly?

Sam: I’ll let you answer that question.

Patti: Yeah.

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

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

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

Sam: They sure do.

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

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

Sam: Absolutely

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

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

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

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

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

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

Sam: Sure.

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

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

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

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

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

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

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

Sam: That’s correct.

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

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

Sam: Sure.

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

Sam: That’s right.

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

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

Sam: Yeah, we love tax-free.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sam: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

About This Episode

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


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

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

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

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

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

Vince Kailis: Thanks for having me.

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

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

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

Vince: Absolutely.

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

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

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

Vince: Oh yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Vince: [laughs]

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

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

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

Patti: Yeah.

Vince: Or in the first hundred people even.

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

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

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

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

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

Vince: Yeah, perfect.

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

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

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

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

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

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

Vince: [laughs]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Vince: Multiple retirements.

Patti: There you go, multiple retirements.

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

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

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

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

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

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

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

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

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

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

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

Vince: Absolutely.

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

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

Patti: Oh yeah.

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

Patti: Oh my God.

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

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

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

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

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

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

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

Patti: [laughs]

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

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

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

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

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

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

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

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

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

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

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

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

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

Vince: Yeah.

Patti: Yeah, well, so much for that.

Vince: [laughs]

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

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

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

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

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

Vince: Thank you. That’s so sweet.

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

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

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

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

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

About This Episode

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


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

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

Gregg, welcome to the show.

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

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

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

Gregg: [laughs]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gregg: That’s right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I just want you to take a minute and talk about, if I’m listening and I’m realizing as I’m listening to you, I really need professional help to get through this in the best possible way. What happens if I reach out to Key Financial?

Patti: I can speak for myself. Advisors handle these things different ways. I’ll tell you, I had a conversation this morning with somebody who had called in. We’re getting a lot of calls, you can imagine. When things are uncomfortable, we get a lot of calls.

Here’s the thing. This is why we’re here. We’re here to help people. They were just really worried. They were scared. I sent them some information. I sent them a questionnaire. I said, “Fill this out because we don’t want to waste time on the phone asking questions like what’s your address, phone number, all that stuff.”

They filled it out. It was awesome, Gregg. If I can say from their perspective and my perspective, I was able to hit the ground running and give them very clear ideas, some dos and don’ts that they could apply right away. For them, it was like low‑hanging fruit. I said, “These are the things, if I never talk to you again, do A, B, and C.”

They happen to also have just been laid off. There are some major mistakes people often make when they’ve been laid off. I just wanted to make sure that this person who I talked to this morning did not make those mistakes. I just laid them out over the phone. They were just so grateful. They’re like, “I cannot even believe that you helped me this much in one hour.”

It was great. It doesn’t always happen. To answer your question, I always offer that free consultation. It’s usually face to face. I will tell you, I prefer face to face because then, people can bring their tax return. They can bring their 401(k) statements. They can bring all of their stuff, their wills, and their trust.

Right then and there, we hit the ground running. I can look at it and get a quick overview of where they are, what they’re worried about, how they’re feeling about things, their risk tolerance, their risk capacity, cash flow. Then we’d get into solving problems, because that’s what it’s all about. Let’s solve problems. It doesn’t matter.

I mean it, Gregg. When I start out with this show and talk about whether you have $20 or $20 million, that person who is listening today that has $20 million, let me tell you something, honey. They have problems. You don’t think that they do. They have things that they worry about. Everything is relative.

I can’t begin to tell you, I have people in all walks of life. There’s just things to think about. Think about that person with $20 million during this downturn. Guess what? Now, they have $12. That’s a big hit. That person spent an entire lifetime accumulating that. I don’t care how sophisticated it’s there, it’s scary.

It’s so interesting to talk with money managers during this period of time. It is so interesting, you can hear it in their voices, the fear. I’m thinking to myself, “Wow, this is really an important period of time for us to keep a clear head and understand that this is happening, etc., but not freak out to the point that you get paralyzed.”

That’s where there become some issues. You got to be nimble. You got to be proactive and understand that these things are temporary. The damage can be very long‑lasting, or at least the opportunity costs can be very long‑lasting.

Because the people, for example, Gregg, that did not rebalance their portfolios in March, wow, did they miss an opportunity? Because they could have gotten the exact same investment at 40 percent cheaper. Hey, same car…

Gregg: Could they be better off today than they were when they…

Patti: Yeah, because market’s doing fine. Now, those people have already recovered. How about that? If they had rebalanced their portfolio and then went into a nice, convenient coma, let me tell you, they’re very happy right now. It’s what you do when these things are happening that make all the difference in the world. Again, a long answer to a great question. I will also say there are lots of good advisors out there. I’m hoping that we’re not the only ones that do that. Again, I’ve gotten to the point in my career, this is really a mission more than anything else.

Gregg: One of my takeaways, and I want to thank you, Patti, is you’ve really reinforced for me that the worst thing I can do today, regardless of what I did in the past few months, the worst thing I can do today is to do nothing and to have no plan.

I feel better having talked to you because I see, as you said, there are so many opportunities out there, both financially in terms of career, and really so many opportunities to look at what’s happening with an optimistic point of view, and to use that optimistic point of view to see that we’re going to come out of this fine if we continue to have that optimistic point of view.

I want to thank you for letting me join you on the podcast today. I’ve gotten a lot out of it. I’m sure those who are listening have gotten a lot out of it as well.

Patti: Gregg, I can’t thank you enough. You just pull it out of me. Like I say, you ask the question and then you let me just go off. I’m so grateful to you for spending time with me, and all of the folks who are listening today. For those of you who are listening, I want you to know that we are here.

We’re here to help you and answer any questions you might have. If this has stimulated anything in your minds, if you’ve got a question, if you’re wondering, “Gee, how come this isn’t happening in my life?” or “What do I need to do in A, B, and C?” whether it be taxes, your portfolio, your medical insurance or anything, feel free, give us a call.

Go to our website at keyfinancialinc.com. Until next time, and there is a next time, we’re going to do more of these with Gregg Stebben. He is America’s journalist, as far as I’m concerned. Gregg is just so relatable and just really has that same heart that I hope that you’re seeing here. It’s all about the heart, and boy, does he have one.

Gregg, thank you so much for joining us and thanks to all of you as well. I hope you have a great day.

Ep46: Covid and Courage: What if I Just Retired?

About This Episode

In this special edition series of the Covid-19 discussion entitled Covid and Courage, Patti addresses the reality that so many in our nation are experiencing right now. What does your retirement picture look like now if you just retired – amidst a global pandemic? Gregg Stebben, a nationally renowned radio host, author, and journalist who has interviewed Presidents, Senators and professional athletes, returns to ask Patti the questions that all new retirees might be asking right now. Listen to find out Patti’s answers and solutions – they might surprise you!


Gregg Stebben: As an Interviewer, I have learned many times that sometimes the best stuff is the stuff that get’s said before or after the Interview actually begins. And in this particular segment, Patti and I actually thought the mic was off at one point when we continued to have frankly a really remarkable powerful conversation about this intersection between retirement and Covid-19. Unbeknownst to us, her producer kept the camera and the recorder running and so we’re able to share that conversation with you. We’re quite delighted even though we didn’t know it was going to be part of the interview. You’ll hear this at about 34 minutes and I hope you enjoy that part and the entire interview.

Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Hey, for those of you who’ve been tuning in, you probably know that I’ve had an incredible guest with me over the last couple of months. His name is Gregg Stebben.

He is what I refer to as America’s Journalist. He’s just amazing. He’s got such a great way of pulling out information that is really relevant for all of you who are listening. We’ve decided to take this wonderful relationship that we have and produce a series of episodes that are really focused on COVID and courage.

In other words, depending on what season of life you’re in, what are some of the things that you might be thinking about? By the way, it was all Gregg’s idea. Gregg Stebben, thank you so much for joining us once again.

Gregg: What a great introduction. It’s really perfect because I want to ask you something Patti, that is very selfish because it’s all about me. I don’t think it’s just all about me.

Something happened to me and my family at the end of 2019, that I think has been happening to a lot of people, before many of us even heard of the coronavirus or COVID‑19. The thing that happened to me and has happened to a lot of my friends is my wife retired. I have a lot of friends who are retired, all at the end of the year.

I could share with you but I think I’m going to keep it private, what impact the coronavirus and COVID has had on my wife’s retirement in my house, and the conversations I’ve had with my friends who’ve retired, about how this has changed or hasn’t changed their thinking about retirement.

Rather than do that, I’d rather hear from you about what people should be thinking about, who retired before they heard about coronavirus, and ways they might be thinking about this in the most productive possible, in the most positive possible way.

Patti: Greg, first of all, thank you so much for sharing that with us. Speaking of courage, it takes a lot of courage to say, “Hey we’re in this too. We made some decisions, and frankly, might be second‑guessing some of those decisions. What should we be thinking about today?”

What’s wonderful is that there are so many people who are listening, who are in that same exact situation.

I will tell you that for those people who have just retired, I got to tell you, welcome to your worst‑case scenario. We, financial advisors and planners, we backtest and run simulations. Part of the planning that we do is to say, “OK. You’d like to retire in six months, a year, two years from now.

“Everything is looking great right now, but what if the month that you retire, we get hit with this wicked bear market, like a 40 percent decline? Would you still be OK?” Now, really, it comes down to the math, but it also comes down to what you do when it happens. Yes, we’re in the worst‑case scenario for your wife and for many people who are listening.

I just know you already, Gregg. I know that you guys have prepared and thought about this period of time, and didn’t assume that the last 10 years or that didn’t assume I should say, that the next 10 years is going to be like the last 10 years. Let’s face it. It’s not. It’s a scary period of time.

The economic recovery is going to be probably very slow, because of the massive amount of unemployment. You have to go back to the depression when we’ve seen unemployment at this level. Now, nobody really knows, including Patti Brennan, whether this is going to be a three‑month deal, a one year deal, or a 10‑year situation like we had in the depression.

When I compare and I think about that period of time, to this period of time, or even the financial crisis, unemployment got up to over 25 percent. We’ve got to be realistic. It’s going to be up over 25 percent now. When you hear that…and I mean this sincerely to you and everybody that’s listening. We’re going to hear it.

Everybody’s going to be on the TV saying it hasn’t been this high since the depression, and therefore, we’re going to go into another depression. I don’t believe that that is the case. The reason that there was such a dramatic downturn during the ‘30s is that GDP didn’t just go down for a quarter, which it will go down.

It will be awful this second quarter, Gregg. It will be awful. Just be prepared. It might even be prepared for the third quarter. During the Depression, that downturn was 25 percent. It lasted from August of 29, all the way through to I think it was June of 1933.

That is a long time to have negative growth. The question is, is how quickly are we going to come through this? We have to make sure that everybody understands the difference between the economy and the stock market. They are definitely not the same. Keep your investment decisions separate from what you do, from an economic perspective.

Gregg: I’m so glad you brought that up, the question of whether we will actually see a depression or not. You and I talked about this in an earlier podcast. I found great comfort in what you said then. I again find great comfort in what you said. One of the things that I suspect has changed from 29 to today…well, two things.

One is I don’t think we have the safety net that we have today, the social safety net. I also think that there’s a sophistication and understanding of how economies work, that we didn’t have today.

Frankly, in your role as a financial advisor, you’re part of how the wealth of knowledge and experience, and knowledge about the economy, gets out to us as consumers, that I just don’t think existed back then. I think back then if you were a Vanderbilt, you had a financial advisor. If you were J.P. Morgan, you had a financial advisor.

I don’t think most people had a financial advisor and didn’t get the benefit of that. What kinds of questions are your clients asking you, that you are able to answer for them that you can also answer for us, that enables us to see that, as you said, the future will be tough? It’s going to be short term, and we’re going to come out of this, and in most cases, we’re going to do just fine.

Patti: It’s a great question. You’re absolutely right. The questions that we’re getting are different questions. They are the questions such as how long do you think this is going to last? Do you think that we’re going to go into another depression? What should we be doing if that is the case? Should we be moving our money into really safe investments?

Gregg, if we were having this conversation in the year 2000 even, let’s even take the more recent, recent past of the 2000s. If you had a million dollars, I could say, “You know what? Let’s put all of that into a 10‑year treasury bond.” Guess what? You’d get 6.6 percent. $66,000 of guaranteed income and chances are you’d probably be really happy.

Fast forward to today, you do that same thing, you’re going to get maybe $6,500 a year. Now, I don’t know about you, but I don’t know many people who can live on six grand a year.

Gregg: A month might be tough, frankly.

Patti: Exactly. It’s a very different environment, so the things that we do need to be different. There’s a theory out there, and I think it’s a good one. It’s called TINA. Have you ever heard of it?

Gregg: I have not.

Patti: TINA stands for, there is no alternative. In other words, we could move all this money into the money market account, but guess what? You’re not going to earn anything. We could move it into bonds, but as I just said, you have to lock in for 10 full years and get 0.65 percent.

Does that sound like a good decision, when, frankly, you could put it into the S&P 500 and get a dividend of 2.2 percent? Now, granted, it’s not six percent, but you get paid to wait. You get the opportunity to just say, “OK. I’m not going to panic. At least I get this dividend.”

What’s really interesting about that is that dividends are a lot more resilient than people realize. Yes, Disney, they cut their dividend. They’re no longer paying their dividend. Not permanently. They just made that decision to get through this period of time. On average, during really bad bear markets, the dividend rate goes down.

It goes down by about 10 percent. Now you’re only getting two percent. You have to have most companies stopping paying any dividends whatsoever, to get down to 0.6 percent.

Again, we have to do differently. We have to think differently during this period of time because guess what? It is different. Now, it’s not to say that all of the rules of thumbs, and the principles that we use that have been time tested, it’s not to say that we’re going to abandon those principles.

That’s so important that everybody listens to that statement. There’s a reason why they are used because over time they work. The importance of diversification. Yes, I totally get it. Having money in international securities has not worked out in the last 10 years. Let me ask you a question.

You think about the trillions of dollars that have been pumped into our economy. What do you think that might lead to? Gee, do you think that the value of those dollars might go down? Probably. What happens to international securities when the dollar gets weaker, international securities outperform.

Now, I’m not saying that’s going to happen. Given the massive amount of stimulus, and the printing press that is spewing out massive amounts of dollar bills down in somebody’s basement, that somehow it’s going to have some ramifications. I just want to make sure that everybody is positioned not for what happened in the last 10 years, but what might happen in the next 10 years.

Most of all, let’s not abandon the principles of diversification, because over time they work.

Gregg: One of the things I’m thinking about as I listen to you talk about this, and as I shared, it’s very real for me and my family, is that we need to avoid fear and embrace flexibility. We had a plan. Sure. We thought, “Oh, maybe we’ll go 30 or 40 years of retirement with no downturn.”

We didn’t really believe that, but we certainly didn’t think that it was going to come two months after the retirement began. That’s where I suspect being flexible, and being open‑minded, and turning our back on fear becomes very important. I know that when I’m afraid, I make really bad decisions. The last thing I want to do right now is make things worse by making bad decisions.

Patti: Absolutely. It’s human nature to think of, and really be much more conscious of all the negative stuff, and of all the bad stuff that is going on. That’s human nature. Understand it. I think that that’s the beauty of planning. You’re absolutely right. We run those numbers also out 30 years.

I always tell people, “Hey, you know what? These numbers look very exacting.” Let me give it to your real. You are not going to have exactly what that number says you’re going to have when you’re 95 years old. It just gives us a feel for the trend. To me, the most important thing is stay in that three to five‑year range, and be adaptable because things do change on a dime.

We’ve seen that time and time again. You always have your plan A, and you got to have Plan B so that when those things happen, you don’t have to think. The problem is, is that people think. That sounds really weird. When you have a strategy that you can go to, if certain things happen, then you can just flip on that switch and go to that strategy.

It’s like, think about it this way, Gregg. Think about it as having almost two budgets. You’ve got your budget, what you want to have coming in. As your wife is now retired and everybody that’s listening who has retired, you’ve got the things that you want to do during retirement.

You have a second one that says, “If we need to tighten the belt, here’s where we go.” You just say, “OK. We’ll go to plan B.” It’s not permanent. At least it never has been. We’re going to get through this. I think that just having those strategies in place in your back pocket, to just go ahead and go and execute them, that’s really the most important thing.

To your point, I think Americans are far more adaptable than I think we give ourselves credit for. I think that to have that, as you guys talk about these things, to say, “Well, OK. This isn’t the worst thing that could happen.” We’re just going to have to go plan B.

To me, the most important thing, and I’m going to bring this up again because I know that we’ve talked about it before, is that for anybody who isn’t retired, or as you’re approaching retirement, or even in the beginning years, when things like this happen, just try not to sell those stocks.

You have a portfolio. It’s a long term portfolio. You don’t want to be in a position where you’re forced to sell low because you need the cash flow. You have that zero to three‑year money safe and secure, you have your three to six‑year money in case it lasts a lot longer than then we hope, and then you have your longer‑term money. That is that money that is the growth‑oriented investments.

That’s your hedge against inflation. That’s why understanding what your cash flow needs are is really important. You take three years of what you think you’re going to need in the next three years, and you put it into much more stable investments, things that aren’t going to be as volatile. That way, as things like this occur, you just use that money, so you can leave everything else alone.

Gregg: I want to ask you, what may be an off the wall question, Patti.

Patti: I love your off the wall questions, Gregg.

Gregg: We’re in this very unpredictable set of circumstances. It’s unpredictable today in the moment. We didn’t even see it coming, so it was unpredictable as it unfolded. It’s going to be unpredictable going forward.

What it actually makes me wonder is, how is this set of circumstances for you, much like your previous life of being an ICU nurse?

Did you learn triage, and adaptability skills, and knowledge, and gain experience there that helps you help your clients today?

Patti: Yeah. It’s a really good question, Gregg. I think that for me when you’re taking care of a patient in ICU, you know that they’re sick, you know, that they’re vulnerable, you know what’s normal for them, and what’s not normal right now. For everyone who’s listening, you know what it was like for you last year, and now it’s different.

You’re vulnerable. Everybody is vulnerable. I don’t care what your net worth is, you’re vulnerable.

The question for me is, as it was for that patient, as that nurse, because we didn’t have the doctor that was at the bedside all the time. When a patient crashes or their vital signs go the wrong way, we don’t have time to chit‑chat on to get the doctor on the phone. They’re probably asleep if it’s in the middle of the night, or maybe they’re in surgery.

We’ve got to know what to do as soon as it’s happening. That training has been very helpful. Perhaps the training and the ability to communicate and understand that that patient, even if they’re not crashing, they’re scared to death.

I will tell you, when people retire, even in a good market, there’s that feeling of ambiguity, of “I’m retiring right now and things are going really well, and I’m going to be OK. I hope I am.” Then you add something like this, Gregg, it’s a scary period of time.

For me, perhaps the most rewarding thing that I do every day is to talk with people and walk them through the fact that we knew that this could happen, and we’ve been prepared and we’re going to get through it. That long‑term, this is going to be a bad memory, but it will be a memory. It does not have to affect their financial security one iota. To keep that perspective is very important.

Now, I will also tell you that it’s not just talk. Just like when that patient is very sick, there are certain things that have to be done. You’ve got to give the right medicines. You’ve got to watch the signs. You’ve got to understand. You’ve got to check the dressings. You got to make sure that they’re not bleeding out, their O2 levels. Check the ventilators, suction them.

All of those things have to be done. If I translate that into a client’s financial affairs, especially someone who is retired and especially in this environment, there are so many awesome things that we’re doing that people can be doing right now. Let me give you a couple of examples.

Think about the CARES Act. We have this massive legislation that is affecting businesses. It is affecting those people who are unemployed. Guess what? It’s affecting people who are retired in a very big way. Think about it this way. Anybody who is retired, who may be subject to required minimum distributions. Guess what? This year, you do not have to take a required minimum distribution.

That’s a big deal, especially if there are other ways to get cash flow, because if you’re not pulling that money out of retirement plans, A, it can remain invested to recover and, B, you don’t have to pay the taxes on that money. Isn’t that pretty cool?

You think about that and say, “OK, if I’m not paying taxes on that money, then that means that my tax bracket is going to go down.” That’s absolutely right. There’s a domino effect in every decision that we make.

In this case, it’s a positive side effect, because this side effect for many people means that they’re going to end up in a 12 percent tax bracket. You might say, “OK, Patti, what’s the big deal there?” First of all, I think, five years from now, we’re going to all be looking at each other and say, “12 percent tax brackets actually existed?”

Gregg: [laughs]

Patti: How about that? Taxes are going to have to go up. Let’s optimize this environment. For anybody that might have stocks that had actually gains, like you might have been with a company and you might have a low cost basis. Did you know, for example, that if you take your gains and you’re in a 12 percent tax bracket, how much tax do you think you pay? None. Zero.

This is different than a concept that we talked in our last broadcast called tax loss harvesting. In tax loss harvesting, there are certain rules that basically it’s called the wash sale. Here, you can literally sell your Pfizer stock, take your gain, and then rebuy it. You don’t have to wait 30 days like you do with a loss.

This way, you’re paying your taxes. You’re in a 12 percent tax bracket. You don’t have to pay. There’s no out‑of‑pocket cash that you’re paying, and you still own the stock. That’s pretty cool, isn’t it? That’s just one example. People who are charitably inclined really want to help their local hospitals.

This concept of qualified charitable deduction still exists, a QCD. Take that money out of your IRA. It’s a great place to go. That will especially be important next year. You might want to make a pledge, because we don’t have to take money out this year, but make a pledge to the hospital and say, “On January 2nd, I’m going to take money out of my IRA and that’s going straight to you.”

That’s something called an above‑the‑line deduction. Again, a domino effect that has a tremendous impact on how much money you end up paying. There is a number of things that this crisis, as with every crisis, there are some opportunities that are created.

Gregg: What’s interesting is that when someone retires, especially if you retired at the end of 2019, and this has been your first quarter of retirement, no matter how big your plans were for your first quarter of retirement, you probably didn’t get to fulfill them. You’re home. We’re all home. We’ve got lots of time on our hands.

I actually wonder if you’re finding that for some of your clients, being stuck at home, retired or not, having negative consequences because there’s lots of time to do things like listen or watch the news. Are you seeing that people are perhaps getting more fearful or more concerned than they really need to simply because they’re overdosing on lots of bad news?

Patti: Absolutely. I’m so glad that you brought that up, because if you’ve got the TV on all day long, that is definitely going to affect how you feel. We all know about clickbait. We all know that negative news sells a lot more than the positive news.

CNBC’s ratings, their ratings right now are higher than they were even during the financial crisis. They’re getting tons of advertising dollars. Remember that they’re in business. That’s what they’re trying to do. They’re trying to get as many eyeballs watching CNBC so that they can charge more money for their advertising.

Just understand that’s the way that game is played. You’ve got to understand that that’s going to have a negative impact. It’s interesting, I was reading this over the weekend. Do you know what the number one disease in the world is right now?

Gregg: I’m going to guess that it’s diabetes or heart disease.

Patti: Both are great, great guesses. Diabetes has significantly increased, especially in the United States. Heart disease is often the first thing, or cancer. The number one disease in the world is depression. More people are being treated for depression than any other ailment.

It’s only going to be more, whether that treatment is pharmaceutical, whether it is going to a psychologist or a counselor. Nothing increases anxiety more than watching television and hearing all the bad stuff, especially for somebody who just retired, who was already going to be feeling that ambiguity.

You think about how those people and everybody is feeling that, “Geez, did I make the wrong decision?” That feeling of remorse, especially now because they can’t do anything about it, because guess what? 30 million Americans are unemployed right now. It’s not like people who just retired can just go back and call their boss and say, “OK, can I come back to work?” They’re going to say, “No.”

In fact, not only are we not hiring, we’re looking at laying more people off. It is a scary period of time. As you said earlier, that fear, we can’t let that fear dominate to the point where it affects the decisions. Feel the fear, it’s OK. It really is OK.

I get back to that patient. They’re scared to death. They’re worried and they don’t have any control over what’s happening to their bodies. They just have to trust the nurse, the doctors. They just have to trust their medical professionals.

People who just retired, you’ve got to trust that you’ve made the right decision. If you have any questions about that, call an advisor, get a second opinion. People like me give free consultations. Sometimes you just need to bounce these things off of someone else to get a sense of, “Gee, am I still going to be OK? What should I be doing?”

A lot of people have frozen. They don’t know what to do and, therefore, they’re not doing anything. I would say right now, inertia is not a good thing.

Gregg: I’m going to open a bottle of champagne before dinner tonight, and I’ll tell you why.

Patti: Yeah, I’d love to hear why.

Gregg: We’re going to celebrate tonight, and I’ll tell you why. You just made me realize something that I would not have even figured out on my own. The reality is, because my wife retired when she did, she knew when she was going to leave the workforce and had the luxury of time to prepare for that.

Now, we didn’t expect what happened. She had the luxury of time to get herself psychologically ready and get us as a family financially ready. That’s something to celebrate, because as you just pointed out, lots of people are unemployed and had no time to prepare. They don’t even know when they’re going back.

We have a really good idea of what our future looks like. That’s a whole other conversation if you’re in that position of not being sure if your job’s coming back or not. Maybe we’ll talk about that in a different segment.

If you just retired and you’re kicking yourself, maybe it’s time to step back and say, “Wow, was my timing amazing? Because I actually got to plan this instead of just being dumped out of the workforce with no advanced knowledge.” That, to me, is worth drinking to.

Patti: I have to agree with you, Gregg. That is a beautiful way to look at this. You do. That was a decision that you and your wife made. It was made for all the right reasons. There is absolutely no reason for you to second‑guess that. You did the right thing. She did the right thing. You guys are going to be fine.

To your point, it’s the people that have been retired, if you will. The layoff is basically a permanent retirement for many of these people who are in their late 50s, ea