Is your financial planner as knowledgeable as they say they are? Do they have all the experience needed to guide you? In this episode, Michael, Tommy, Ben, and John dive deep into the common misconceptions surrounding financial planning. They challenge the notion that anyone can be a financial planner and stress the importance of transparency in the industry.
Listen in as they shed light on topics like estate planning for everyone, why financial planning extends beyond insurance sales or investment management, and how to optimize tax strategies effectively. You'll discover the truth behind financial planning and empower yourself to make informed financial choices for your future.
Listen to the full episode here:
What you will learn:
- The importance of being able to have hard conversations. (4:15)
- Why your financial planner needs to be transparent with you. (6:15)
- The benefit of doing your due diligence before hiring a financial planner. (14:00)
- Why estate planning is for everyone—not just the rich. (16:00)
- Whether there is a certain amount that you can give as a gift before taxes. (20:00)
- Who the gift giving rules apply to. (26:00)
- How you can reduce your tax bill. (30:00)
- The importance of making educated decisions. (34:30)
Ideas worth sharing:
- “Not everything is always perfect, and we need to be willing and ready to have hard conversations.” - Mason & Associates
- “Don’t let whatever imaginary number is in your head prevent you from giving money away today if that is your goal.” - Mason & Associates
- “Sometimes paying taxes can be a good thing—we shouldn’t be afraid of them.” - Mason & Associates
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, Certified Financial Planner and President at Mason & Associates. In today's episode, we have the usual crew, Mike Mason, Ben Rakes, Tommy Blackburn. And as we record this in December of 2023, we know it'll launch guys in 2024. We are so excited and thrilled to be able to do this podcast. I'm very excited to be able to do it with friends and family and going into our third year, gig thanks to you all for allowing us to do this podcast and contributing as much as you do and thank you to our audience. It's been a wild ride so far.
Tommy Blackburn: Absolutely. 2024, really looking forward to it. 2023 has been a roar. I'll tell you what the 2020s have been an interesting time to live in. Families are changing. Ben recently married, and still married and buying a house. So big things are happening over there as well as joining as an owner of the firm. So big things in 2023 and 2024 for him. Us, our family continuing to grow, and Nate was a recent addition. So we're looking forward to watching him and Zoey continue and it's just a fun age with Zoey as I'm sure it is with Carter and it does all of our hearts good to see those two running around and living their best life every day.
John Mason: Well, this is the, Tommy, the Federal Employee Financial Planning Podcast I don't know if you and I have talked about this at all yet, but you know, at least in our family, we tell Carter that Santa is real and exists at least for the time being. So we're having a lot of fun with Santa Claus and the magic and everything that is involved with Christmas time.
But it is amazing, just as a side note and no judgment to anybody out there who's listening who believes you shouldn't lie to your children because understanding that Christmas is a feeling and Santa and all these things, we've met a lot of people who don't believe. In celebrating the Santa kind of experience with their children, so I don't know what you guys are doing at your household.
Tommy Blackburn: We're the same. It's magical and to just see the joy and how they light up and you're right, everybody make their own decisions and you have, I assume, your reasons to make those decisions, but I can't imagine not enjoying this experience.
Michael Mason:Are you guys actually telling me that Santa's not real? Come on, man
John Mason: Santa from the Santa Claus, Tim Allen over there.
Michael Mason:Sorry. We always, I'm sure we could come up with many analogies of lying to your kids. You don't instantly tell a three year old that just started talking that, you don't teach them about death, so withholding information or even skewing information, there's times that you should do that.
So anybody that believes that, you got worse problems. Maybe you should be thinking about the real problems we have in the country versus Santa Claus, right?
Tommy Blackburn: That's an interesting thing to be tied up on with everything else we have to worry with.
Michael Mason:There you go, John, I know I stepped in it with you, you got bigger problems if you can't tell your kid about Santa Claus.
John Mason: Well, we had, for a long time, we've done the radio show, which we don't do anymore, but we did it for a long time, many years, and we did radio advertising, and one of the things, Mike, that you used to say on the radio program was we'll tell you the things that you want to hear how to go or–you know things better.
Michael Mason:We're gonna tell you the things you need to hear, not necessarily things you want to hear.
John Mason: Exactly. So yeah, this is completely off the cuff as we think about this, but like we're experiencing Santa. We're experiencing Christmas and like right now we, personally in our family, don't feel the need that we need to explain that Santa is not real, and we're going to allow Carter to enjoy this experience and we're going to celebrate it with him.
And eventually, we're going to have some of those hard conversations about things that he maybe doesn't want to hear, but needs to hear. And as you think about listening to this podcast, our audience, maybe they're working with a financial planner and is it always Santa Claus? Is everything always magical?
Is everything always perfect? Or is your financial planner giving you the real scoop and the real story and prepared to have those hard conversations with you? Because not everything is always perfect, and we should be ready and willing to have those hard conversations.
Tommy Blackburn: Well, the first misconception there, I would say, is that you're working with a financial planner, because most of the time, you're not, as we know.
John Mason: Well, you just went right in, Tommy. So what we're talking about on this episode, and this was Ben's idea, which we think is great, is we're going to talk about avoiding or understanding the common misconceptions. So number one is you're already working with a financial planner. Misconception. And our experience, Tommy, is that most people out there are asset gatherers or some sort of product salesperson.
And that's not meant to be overly disparaging, but we've met a lot of financial planners out there who just do not do the things that they should be doing, that don't hold them to the standard that they should be held to.
Tommy Blackburn: Well, truthfully, this is maybe me on a soap box here a little bit is that anybody can call themselves a financial planner is truly a problem in my opinion.
And that's part of it is because you have a few out there. You have financial planners that we respect as peers and we know are doing great work. Then you have financial planners who have the want-to but not the know-to, as Mike would say. And maybe, they're not doing everything they should be doing or could be.
And then there are people where it's like you're not in no shape or form a financial planner. You are a product salesman of some form, but you are not a financial planner, but you are masquerading. Maybe you don't know that. I want to give them the benefit of the doubt but you should not call yourself this because this is not–and you've got your clients and the general public confused is why I get upset about it because it's like that's not a financial planner that you're working with.
Ben Raikes:I think another one that goes along with this and it's unfortunately something that I have heard from relatives before, it's these folks are working with a financial advisor, but then I hear, “Yeah, I work for my guy and he doesn't charge me anything.”
So not only do you work with the financial planner, but they're not transparent about how they get charged. Normally, I think, okay, do I pay this guy hourly? I never write him a check. I don't ever see anything come out of my accounts, but there's some trades and activity in there. It's shocking today that some people really don't know that yeah, your financial planner is not doing this for free.
John Mason: Or maybe he's only meeting with you, he or she is only meeting with you to potentially generate another commission sale. So like there's an opportunity that maybe they are working for free cause they're in the commission side of the house and they meet with you frequently enough so that every–frequently enough they can generate a nice 7% commission or whatever they are now to continue to turn the lights on.
And so nobody's working for free. Your financial planner, in air quotes, is not working for free, and we cannot use, Tommy, to your point, title to distinguish between credible and noncredible. We can't use title to determine competency or incompetency, and frankly, we also can't use CFP in a lot of instances to do that.
And we also, as we think about credible or understanding who we're working with, we also can't use the word fiduciary. Because if you call somebody's office and you say, “Are you a fiduciary,” just like in Ghostbusters, they're going to say yes, right? You remember–
When somebody asks you if you're a god, you say yes. And when somebody asks you if you're a fiduciary, they're going to say yes. Or they'll say something along the lines of, “Well, I'm not held to a fiduciary standard by my broker-dealer, but I hold myself to that standard.”
Michael Mason:So I watched Yellowstone. We're binge-watching Yellowstone. John Dutton went to pick up this woman, he bailed out of jail, she was a protester, and he bailed her out of jail, and he says, “Why don't I take you back and show you my ranch, so you know what you're complaining about, the cattle and whatnot,” and she says, “Can you tell me that you're not like a 55-year-old crazy guy that's going to pull off the side of the road and take advantage of me?”
He said, “Well, if I was a guy that was going to do that, I would probably give you my word I'm not going to do that and then break my word,” which is what you just said, right? And I want to expand this a little bit because we beat up on people that in our industry a lot and we would love, and we know the government can't do this, they can't legislate morality. So we would love everybody that calls himself a financial planner to be a financial planner. But as we discuss things that the common myths out there, just understand that we would also love everybody that has the title of congressman or woman to know what the heck they're doing, they don't even know the current tax code, but they're willing to change it, right?
And we would love that those people that charge you to do your taxes are doing something other than accounting for last year.
Tommy Blackburn: Or at least be transparent. Just say that's all you're doing, and, “I'm just preparing a tax return. Don't look to me for anything other than putting this form together.”
Michael Mason:And maybe if you use TurboTax, Tommy, this is your return in using me. Well, it's the same thing. Instead of saying, “Oh, look at what I did for you.” Well, anybody could have done that because you're overpaid. So let's–’cause we are going to expand this, right? We're going to expand it. We might talk about misinformation about professional realtors, it could be anywhere where there's misbeliefs and we're not necessarily talking about lies.
It's what we believe. It's what the consumers believe. And I think is where you wanted to go with this, Ben, and how we can fix some of that.
Tommy Blackburn: If I may on this financial planner one too, again, I want to call the misconception ‘cause we kind of just hit on commissions and fee only and so forth. But we've got fiduciaries, RIAs, managing money, money managers who call themselves financial planners and aren't that either.
And I don't know if it's an oxymoron or what we want to call this scenario, but when we get calls from people that say, “Oh, I've got a guy. But I would like you to help me do financial planning.” It's this is just, you're conflicted, my friend. I don't know what else to call this.
Michael Mason:I've got a guy that he can't answer this.
John Mason: So common misconception is that financial planning is insurance sales, misconception. Another misconception is financial planning is investment management. Financial planning is not either of those two things, like risk mitigation strategies, insurance, investments. Like all of these are things that should be in a financial plan, but thinking that a financial plan is Ned "The Head" Ryerson or thinking that it's the investment guru. These are not what financial planning means. So I think that's a big misconception and hopefully, ‘cause I think we've seen some momentum maybe this weekend, reading that there is some legislation and push to get name recognition for people who are doing real financial planning and distinguish it from all these other consultants, advisors, wealth managers, wealth preservers, whatever they want to call themselves. Hopefully, we'll see a little bit of push in that direction, but it's been failing for years.
Michael Mason:Part of that, what financial planning is is tax planning, and all those people you just talked about, if you ask them for some help, tax planning, what would they tell you?
John Mason:“We can't give tax advice,”
Michael Mason:Right. So the one thing that they could kind of lean towards in the financial plan is the tax advice which they can't give, and they can't give it not because they're legislated not to give it. They can't give it because they're not qualified.
John Mason: Sure and as we continue down this topic, we were talking about financial planners and the misconceptions. I've received a phone call last week from a guy that I enjoyed, a couple of times around a campfire, we were RVing together and we had a friendly relationship.
It wasn't anything dramatic, but it was friendly. And he called the other day, said, “John, how you doing, man?” I said, “I'm doing great. What's going on? I'm kind of busy. I'm preparing for the Kitces Value Summit, but what's up?” And he said, “Well, I just thought I'd call you and let you know that I'm starting a financial consultant business.”
I was like, “Oh you are, that's interesting.” And he's, “Yeah, I'm with MassMutual and I'm just calling to get the word out,” or something along those lines and hopefully, I provided value to this person and mentioned Kitces and mentioned some of the other resources that are available. But the common misconception is at the end of the day, as nice as this human is, at the end of the day, as nice as this human is, he's going to be able in the current world to call himself a financial advisor tomorrow.
He just passed the Virginia Life and Health yesterday. He has zero credentials, zero qualifications, zero anything, zero experience. And tomorrow he's going to be able to call himself a financial planner. If you are that human who called me last week, I'm sorry. I'm not trying to be a bad guy or tell you your career is not going to go well.
But, you've got a lot to learn and you've got a lot of studying to do to be able to call yourself, in our opinion, a financial planner.
Tommy Blackburn: So there's a lot of harm you could do. That's like the other concern here, right? Because you say, “I'm a financial planner.” People trust you as being that trusted resource. And you're still very green and unknowledgeable, and you probably know enough to be dangerous at best.
Michael Mason:And the people that you get to put on your training ground are the hundred people closest to you because that's who you call.
John Mason: Project 100.
Michael Mason:Right, you have no marketing whatsoever. So Ben, why don't you take us to another common misconception? I don't know if we're going to get through the whole list, but where did you want to go next?
Ben Raikes:I think this is one that we hear a lot because as part of the initial financial plan and certainly as ongoing meetings happen, we always inevitably talk about estate planning. We talk about beneficiaries, we talk about wills, trusts, powers of attorneys.
And I won't say all the time, but frequently enough, we get the pushback that says, “Well, aren't trust just, aren't they only for rich people?” And that is, in my opinion, a giant financial misconception. You probably, again, we always go back to Fox News, CNN, MSNBC, and you hear about somebody, a trust that controls a corporation, or you hear about how someone's trust helped them avoid this tax or that tax.
These are not the types of trust that we're talking about. We're talking about ease of distribution at for your estate when you pass away and that's really a what is it two or three-hour conversation with an estate planner that's getting a will completed, a trust completed, advanced medical directive completed, powers of attorney, all of those good thing, and it's going to cost you somewhere between 1,500 to 2,000 dollars.
Now that might be a lot for some people, but as the ease of management that it's going to give you at the end of the day for your estate and how clear it's going to make things, well worth the cost in our opinion. So certainly trusts are not only for the rich.
John Mason: So what I'm recognizing about this episode is there's like the overarching or overarching misconception. And then there's all of the sub-misconceptions in there, right? So only the rich do estate planning, misconception number one. And then there are so many misconceptions in there. So like you mentioned so many of these things. So like we do estate planning for tax reasons. Well, probably not anymore. Most estate planning is the efficient transfer of assets. We're not really planning for death taxes in 2023 and 2024.
Tommy Blackburn: And that's what I was going to discern is everybody says, “I don't want to pay estate tax, I'm trying to avoid estate taxes.” Well, that's not an issue for most of this country at this point when we have exemptions of like 13 million.
Ben Raikes:Do you have less than 25 million dollars? Okay, that's not an issue for you.
Tommy Blackburn: But we may actually be thinking about income taxes in that transition. So it's like which taxes are we talking about? Could be the misconception, but usually it's more just about what are your goals. And how do we do this in an efficient way? But we don't even have the right tax systems we're referring to.
John Mason: And then as far as cost, Ben, you're exactly right. We may be able to get an estate plan for 1,500 to 2,000 in Yorktown, Virginia. But there are other places where maybe, or maybe your estate plan requires two separate trusts, or maybe it's more complicated for whatever reason. So I would say if you haven't done your estate plan yet, audience, playing for 5,000 on the high side would probably be like a reasonable and hope for something a little bit lower. How about this one? I really need a will because my will actually does a lot for me.
Tommy Blackburn: Yeah, well, I'm just thinking, well, there's so many things here. One is do you even have a qualified estate attorney? I don't care if they're charging you 2,000 or 5,000 because either one of them could have a different agenda than what you think they have, and you could get documents that are meaningful, or you could get documents that were just print and complete, and who knows who they apply to.
The other one is, I've got my state documents. This is a big misconception. I've got the documents. I'm good. One, I haven't looked at them in ten years, and two, I never did anything with them after I got them.
Michael Mason:And you guys, let me tell you something, we're right on, and I like the way this is building, but I, and you chop my legs off if you want, we have a state planning podcast and whatnot so there's so many of these misconceptions to get to. Let's not go down a rabbit hole with each one. I will say that you guys have hit a misconception that I will raise to the top and that's cost versus benefit. If your vehicle which gets you back and forth to work every day is going to cost you fifteen hundred dollars to get it fixed, guess what? You're going to spend the fifteen hundred dollars.
Here's what I've learned in my 37 years in this business is people don't think they're going to die, so it doesn't ratchet up, and we'll use this example the other day when a woman called in this office for an intro phone call and it was going to cost her $40,000 to buy her CSRS time to get $20,000 a year every year in retirement for the rest of her life.
She needed us to tell her that was a good deal. So this is what we battle out there. We need to tell somebody that $2,000 for a trust is going to wipe out aches and pains and hours from your heirs when they can't even realize on their own that 40,000 one time to get 20,000 forever, so a misconception of cost versus benefit.
John Mason: Yeah the value and understanding what you're getting from the estate plan. And so I guess we'll wrap up estate planning with a few comments like one, your will, you should have one if you don't have one, but the importance of it is largely determined by whether or not you have a trust. And then it's also largely determined based on everything else you've done, joint ownership, beneficiary designations, the state you live in for that matter.
And also saying, I need a trust, well, I have a client in Alabama who's a state planning attorney said, “We don't do a lot of trust in Alabama.” And I really tried to fact-check that person, but I don't live there and I don't have a lot of contacts in Alabama. So we have to go on this professional's understanding that we don't need a trust in Alabama for whatever reason.
If anybody's listening from Alabama and you think that I'm wrong or that we were given bad advice, please shoot us an email and let us know. So they're not irrevocable documents. You can change them, you can modify them, and oh, by the way, if you're listening to this podcast, it means that you're alive, which is great.
If you are under age 60, you are more likely to end up incapacitated or disabled than you are dead, which means the advanced medical directives and the powers of attorney are actually as important or more important when you're in that like mid-career age as the death documents. So hopefully that puts a bow on a state planning. There's a lot of misconceptions there. How about we go next to, “I can only give my kids x dollars this year.” Misconception.
Ben Raikes:So we've done a, I'll plug our YouTube channel because we've done a video for that as well. A lot of times we have, particularly with our federal employees, we have Federal employees that are making much more money in retirement than they have their entire working careers. Their TSPs and their IRAs have done incredibly well and they're looking at a place that says, “I've got all this cash I'd really like to help my son daughter, niece, nephew, grandkid,” with whatever it might be.
“I'd love to give them some money, but you know, I know there's only this certain amount. I think it's like 17,000 that I can give them. And then I have to pay a bunch of tax, right? So I'm just going to give them 17,000 this year and maybe we'll do another 17 for the next couple of years.” And I just, in my mind, I like, all right, I'm going to let this play out.
I'm going to let you get it out. And then I'm going to tell you that is only for what is required to record a gift. You do not owe taxes from giving a gift to someone that is over $17,000. What you file when you make a gift of $17,001 in 2023 is you have to file what's called a Form 709, a gift tax return, to record that return to–I'm sorry, to record that gift and then you have annual exclusions and you have lifetime exclusions. I think Tommy said the lifetime exclusion is 13 million dollars per person this year. So let's call it 26 million dollars as a couple, you can essentially give away millions and millions of dollars without having any tax complications. So don't let that be the reason that you say, “I want to give more, but actually I'm just going to do this, whatever 17,000 is this year.”
Tommy Blackburn: And I almost think the misconception there is people just think you can't give more. I don't know that it's even like I might have to pay taxes once I do that. It almost seems like there's this gift police out there that says, “I can't give more than 17,000 if bad things happen.” And it's like okay, that's misconception one, you can go over it. And if you go over it, most likely we just have to, in Mike's famous words, do some paperwork.
John Mason: Account. We have to account for it. We have a misconception on whether or not we're talking about income taxes or estate taxes as it relates to gifting. We don't understand often that it's 17,000 per person. So, Sarah and I could both give money to Carter. And there is so much around. And nobody is due any taxes, right? We've heard so many times, “I don't want to gift x dollars–I don't want to pay taxes or I don't want to gift y dollars because I don't want them to pay taxes.” There's so much around this and then we'll, we probably have other shows where we can talk about efficient ways to give assets to your children. That's one financial planning story. That's a hero story.
I think that there's so many ways to give and we shouldn't let it stand in our way, even if it means doing a little bit of paperwork.
Ben Raikes:And I think the bow on this one is just don't let whatever that imaginary number is in your head prevent you from giving money to people today if that is your goal.
There's no, again, I really like what Tommy said, the gift tax police are not coming around and telling you and slapping you on the wrist and say, “Nope. You gotta give that money back.” Don't let this number ruin giving gifts to children, grandchildren, whoever it may be.
John Mason: It may be a really interesting, just quick story on gifting. I think it was in 2021, we were helping a client, we actually used an outsource tax provider to help prepare their return for this very reason. Their child wanted to buy mom and dad's house. And that's a controlled sale, and they were able to sell the house at a price below fair market value, which ended up being a gift more than $34,000 or whatever it was, and it triggered a 706? 709 gift tax return.
And if we had, one, if we had been so scared of a gift tax return, the family house that was the family house for 20 or 30 years would have fallen out of the family. The clients netted the same as they would have netted had they hired a real estate agent. And then the child and the spouse and the future kids got an awesome deal on a lower mortgage and everything.
Think of the repercussions to that family if we had just been so scared of a 709. What would have happened? Just thinking about the family house not being the family house anymore. It's like wow, we don't want to be scared of this stuff
Tommy Blackburn: What's the value of that, just the sentimental of keeping the house? I don't know, we'll just do another quick one on this because I think it illustrates at least what real financial planning is. We had a client with concentrated stock. They had built up and at the same time, their daughter wanted to buy a house. We wanted to diversify etc. So part of the strategy here was gift your daughter this stock.
That's highly appreciated. Guess what? She's early in her career. She's at a lower income tax. She's going to pay less taxes on that gain. So we shifted it to her. That was a benefit. You got rid of some of this stock that we needed to get rid of, and your daughter bought the house. And the stock then tanked.
Luckily for us, it was just sage advice. So everybody won. It was another one of those beautiful stories.
John Mason: that's financial planning.
Michael Mason:Many times when you understand the reason behind a tax law, you better understand the tax law. So, if you could give away unlimited, and you guys have already said it, 13 million, individual, right?
13 million, anything I have over and above 13 million, in my own personal right, if I die, is going to have an estate tax. And it probably starts at 50%. So, if not for the rule that caps how much I could give, let's say I'm worth 113 million and if the market keeps going right by next June, I'll be there.
That was a joke. Let's say I'm worth 113 million and I'm on my deathbed. Well, if I could just give away a hundred million today, then Uncle Sam doesn't get in the state tax at all because 13 million transfers. So the whole reason behind it is not to cheat. The gift limits are not going to affect 99% of the population.
So if you have giving goals, work with somebody that understands it. It's not going to affect you. Don't run away from it. Don't be afraid of it because it's probably not going to affect you and your family.
John Mason: I think you guys have hit on some interesting things here is maybe a common misconception around just taxes, in general, is not doing things because it's going to cause a tax bill.
So this could be like not doing Roth conversions because you have to pay taxes today. Or it could be like not gifting money or selling RSUs that just vested because we're worried about exercising this or doing that because it's going to generate a tax bill. But if it's just sound prudent financial planning advice, sometimes, paying taxes is a good thing, and paying taxes and diversifying before an asset goes down 50%.
Mike, I know you've used this analogy before, long-term capital gains are 15%, and then you have the 5.75 in Virginia. Sometimes paying taxes is a good thing. We shouldn't be so scared of the tax man. We shouldn't let it paralyze us from making really good, prudent financial decisions.
Tommy Blackburn: Or just think that prudent decisions are somehow going to get you a slap on the wrist or that some type of rule is being broken here.
No, these are the rules. We're going to play well within them, but there's actions we can take, and we're allowed to, we're encouraged by the law to do these things, so. Don't be, to your point, don't be afraid.
Michael Mason:It's almost like telling the bank don't pay me that 5% of my $100,000 because Uncle Sam's going to get 30% of it. Well, if you never sell that ball stock or that Dominion Resources, if you sold it at a high price, you avoided a 50% butt whooping on Dominion Resources and Uncle Sam got 20% of it.
John Mason:You both won, I guess.
Michael Mason:And that's kind of your fair share, which we'll probably talk about fair share later on this one too.
John Mason: So maybe because we're getting close, we're almost 30 minutes in, maybe we can just do some rapid fire with minimal dialogue around some of these additional ones. So the mortgage interest deduction, this is often preached by realtors or family members, even trying to consider or encourage young professionals to go buy a house.
“You should go buy a house because the interest is deductible.” Well, we know that for a lot of people, specifically if you've refinanced below 4%, that would be a big mortgage before that would be deductible. And that's one reason the state and local income tax cap is another reason. Now maybe in 2026, mortgage interest will be deductible again.
Maybe if your mortgage is big enough, it's still deductible today. But now with rates going back up, it's changing. So a common misconception is that the pure act of having a mortgage means you have a write-off. The pure act of having a mortgage doesn't mean you have a write-off, it means that you could have one if everything lines up to where it actually provides a tax benefit.
Michael Mason:Yeah, we'r ekeeping those medical receipts, so it was a 5-dollar co-pay for this drug and a 10–and you had 14 pages worth of stuff that adds up to 2,200, 2,205 dollars or something. And it was worthless because your standard deduction is going to overwhelm it.
Tommy Blackburn: Probably cost you money because you might have paid somebody to go through all those receipts just to determine it got you nothing.
Michael Mason:Right.
Ben Raikes:I think, another quick one in very similar vein to that, John, is people who owe a lot of money in taxes or they have to pay taxes in April. They think, “Can't I just give money to charity or something? I heard that saves me money on my taxes.” Two parts there. One, if you're itemizing your deductions, which you are probably not, and you're in the 22% tax bracket, if you give $100 to charity, that saves you $22. So you spent 78 to get a $22 deduction. Don't give to charity because you're trying to save money. There are efficient ways we can do that. But give to charity because you want to give to charity not because you're trying to save taxes I think I had two points there, but I might have just covered both of them.
John Mason: Well, you hit another really good one. And I think it's a misconception too that, and we have people call introductory phone calls. We have clients that ask this. It's like, “I really need to reduce my tax bill.” And I'm like, don't we all, right? And they're like, “Well, what can we do to do that?” I'm like, there's nothing.
There's nothing that we can do to really reduce your tax bill. For most of our clients like the tax bill is what it is. Now there's special cases where we could put in a defined benefit plan or something for a business owner that's highly compensated. But if your retirement income is like social security, and FERS or what have you, like your tax bill is your tax bill, but there are strategies that we can be smart, like qualified charitable distributions and Roth conversions that change the dynamic, but there's not like a whole slew of magic write-offs that we can just claim. There's planning we can do, but there's not a whole slew of magic write-offs just waiting to be had out.
Michael Mason:There's special write-offs that only the millionaires with the great accountants get, right?
Tommy Blackburn: Who do you write it off to? That doesn't exist. The charitable giving stuff is great when it makes sense. But I just got to get this story out real quickly as a client years ago sent me a Wall Street Journal article “There's Ways You Can Lower Your Taxes” and it was, “Why aren't we doing any of this?” And primarily it was about charitable giving like, “Hey, set up a donor-advised fund, give appreciated stock, do QCDs.” I said, Gene, “I would love to put these things in place for you, but last time I checked, you weren't charitable.”
And she said, “I'm not.” It's the same concept of the 22%, like you giving a dollar to save 22 cents, you're still out 78 cents and that's not of interest to you. So that's why I haven't talked to you about these things.
Michael Mason:Many times my answer to that person that calls in is going to be, “Yeah, the best thing that this country has done collectively to lower everybody's tax bill was voting Donald Trump into the presidency in 2016 because we're now in the lowest tax brackets we've ever seen.”
Like him or not, that's where we are. So the answer back is you need to pay some taxes and you're in the lowest tax ever of your lifetime. It's okay to pay some taxes, just accept it.
John Mason: So a couple other quick ones is, Mike, you've heard this since 1983 when you were in the military, “I'm going to leave the military and I'm going to go make the big bucks.”
Well, we know looking at base pay, whether it's food allowance, housing allowance, and base pay altogether, active military members are making a good salary when 50% or more of their income in a lot of instances is tax-free. The taxable equivalent's a big number, so going to the private sector to make the big bucks is not as easy as we think, especially if you start looking at, “Well, I'm going to be able to retire at x age with a defined benefit, pension, et cetera, et cetera.”
Going to work in the private sector to making the big bucks is probably a misconception.
Michael Mason:Study after study has been done and this has been, it's a conundrum and I think I'm using the word correctly. The federal government and the military folks, they want to look poor when it's convenient to look poor, and then they want to be rich when it's convenient to be rich, i.e. retired with a pension, health insurance for life, and whatnot. So study after study has shown the 90th to 95th percentile. That means if you're enlisted like educated folks, you're in the 90th percentile of people that have your skill set in your education. And if you're an officer, it's the 95th percentile.
And why is it important? It's important because you could be at the 10-year mark, and you're 10 years away from the golden ring where not only are you going to get that pension, you're going to get health insurance forever. And 90% that go out get a tax-free, you know, disability forever and you're sitting here being told that you're enlisted in your own food stamps and you think you're in the 10 percentile versus the 90s.So it's important. It's important to know. Huge misconception.
Tommy Blackburn: I would take that even further. So we went from military to private sector or public service. I think about two of self-employed or say you want to go start a business that takes it a whole nother step where apples, it's not apples to apples, right? Say you were making six figures in the private sector, you gotta make more if you want to own your own business because there's additional taxes, benefits, and things that you have to now pay for.
So again, I think it just goes back to making educated decisions and realizing things aren't always what they seem.
John Mason: And we'll just go ahead and throw this out as an example for the audience. And please don't fact-check me because the numbers are probably not accurate, but for illustrative purposes only, if you're making 75 to a hundred thousand dollars combined pay, military right now, active duty.
If you were to take a private sector job at Booz Allen or wherever you need to make 150 to get to the same spot. And if you're making 150 as a highly compensated person at Booz, and you want to start your own LLC or S corp, you probably have to make close to 250 or 300, right? So you almost double each time you make that change.
So again, it's not a hundred percent well thought out, but I think for illustrative purposes, it's fairly accurate and gets the point across. How about we continue? We said, we're going to leave the military and go make the big bucks. How about federal employees are underpaid and over-benefited? I think we, that may have been true when Grandpa John was NIH back in the 60s, 70s and retired in the 80s.
But what we've seen over time is that benefits have remained lucrative and compensation has increased over time. So what used to be true probably when Grandpa was driving to, I believe it was Bethesda, probably not the same story that we're talking about today in 2024
Michael Mason:Yeah, it's well, there's no doubt. There's no doubt and that's why we have a podcast on the secret millionaires and it's you know a phrase we coined years ago and for the same reasons, this is not to call you out as a federal employee, but for the same reasons that we talked about the military, if you believe a story that's been told long enough, you'll make bad decisions from it.
So with your pension, with your health insurance benefits, with your pay, I've just done it here in Virginia, compare an engineer on the Virginia retirement system, in the Virginia retirement system to one at the federal level. Those federal engineers make more money, right?
Now, again, you can be superb like one of our clients is, top 1% of your career field, and you're going to make more in private sector, but for the average person, you're well compensated and over-benefited.
John Mason: Now, one benefit of believing this misconception, Federal Employee Financial Planning Podcast, one benefit, if you're listening, yes, you are underpaid and over-benefited, and the beautiful part about that is when you get to retirement and you hire somebody like Mason & Associates, we can show you that in many instances, the grass is greener on the other side and that you're going to make more money in retirement than you did while you were working.
And that mindset, it's both a blessing and a curse. The curse part is you did without when you didn't have to do without. The curse part is you get to retirement and you don't necessarily believe us just yet. So you're leaving money and opportunities on the table and the blessing is you didn't have all those years of lifestyle creep and all those years of overspending that we have to then somehow figure out, we're going to fix this in retirement.
So believing that misconception can be both a blessing and a curse. Guys, I think we should probably wrap up this episode, maybe round the table with any action items or final thoughts as we close this one out.
Michael Mason:Yeah, I'll take my final thought, and it's the fair share thing, right? The biggest voting bloc in America will be our seniors if, and this is not speaking to our federal employees if you're senior and you're retired only on Social Security and that's your only income, and the government tells us that's 66% of the population, well, if all your income is Social Security, you're not paying any taxes and you won't pay any taxes for the rest of your life if that's your only income. So be careful of saying, “I pay my fair share.” Understanding what you're paying, and it's probably not much in that demographic.
Ben Raikes:Just a quick one for me because I really like this stat. I feel like we always hear clients say that, “I don't think I'm going to live very long. I just, I know it for whatever reason, I'm not going to live very long. I want to start all of my benefits today because I want to start collecting before I'm out of here.” An interesting stat is that of every human being that has ever made it to 90 years old or more, 90% of them are alive today.
So just think about that. Again, people are living older and older and older, of every human being that's ever lived that's made it to age 90, 90% of them are alive today. My wife had a grandmother and an aunt pass away this year, sadly. The aunt was 102 and her grandmother was 96.
Tommy Blackburn: Well, and there's another stat. I don't know it off the top of my head, but it's something like if you made it to 60, your probability of making it to 90 is like 70% or something so it's not just the normal lifetime table. You got to take, you've already made it this far, chances are you're gonna go a lot longer because you made it here and longevity just happening now.
Michael Mason:100% of the people that turned on Social Security at age 70 versus 62 and died one year into it, a hundred percent of them never floated up to heaven kicking themselves in the butt for delaying till age 70.
Tommy Blackburn: Exactly. I think the biggest takeaway for me as I think about all this is just don't accept what you believe to be fact as fact or don't, the common, you know, truisms of these things are always true because we just went through all the misconceptions. So sometimes revisit biases or just preconceptions that we have because it may very well be inaccurate.
Michael Mason:I think this may need a volume two on this podcast.
John Mason: Yeah, we may need to do another episode of common misconceptions. I know there's a lot more. Ben, you mentioned life expectancy, you and Tommy both did. And we often refer to the 50s and 60s as like the danger zone for clients like we see heart attacks.
We see cancer diagnosis We see all of these things that happen in their 50s and early 60s. That's like if they make it past that point, then we're going to 90. And it seems to ring true and it seems like making sure that we're doing things like electing survivor benefits, making sure that we're doing these prudent decisions like delaying social security or having term life insurance through those danger years makes a lot of sense.
One common misconception is retirement spending is linear and that it just arbitrarily does the same thing every year, grows every time. And unfortunately what that does for folks is it creates a. financial planning output that doesn't give you empowerment to actually enjoy your wealth and enjoy everything that you've saved.
And it forces an overly conservative behavior. So retirement income spending is not linear and it does in fact change over time in many different ways. Folks, this has been another episode of the Federal Employee Financial Planning Podcast. As always, thank you for being here. Thank you for supporting us.
Do all the things. Help us celebrate as we go into our third year doing this podcast by leaving us comments, sending us emails to MasonFP, like MasonFinancialPlanning, @MasonLLC.net. We would welcome any critiques, any positives, hopefully, five-star reviews, hopefully, five-star comments. If you haven't already seen our YouTube channel, Youtube.com/@fedemployeefinancialplanning. We are going strong. Three years doing this podcast and six months or so into our YouTube channel. We're so thrilled to be able to provide you this content. And we'd love to hear from you at MasonFP@MasonLLC.net. And until next time. We hope that you have a great year.
It's beginning of 2024. It's going to be a different year. Let's make it a great year. And remember, we're here to support, empower, educate, and motivate you to make changes in your financial plan.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.