The 3 Worlds of Money

Full Transcript:

Ryan: You likely needed to set it up when you were under 50 years old because if you set it up older than that, typically the cost of insurance inside of these products really doesn't make a whole lot of sense to utilize.

Announcer: When it comes to financial planning, you need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations: Retirement Talk with Ryan Cravitz of Cravitz Financial and Insurance Solutions.

Ben: Welcome to Candid Conversations: Retirement Talk with Ryan Cravitz. Got a good show for you today. Going to talk about the three worlds of money. Really when you think about investing, you can really boil it down to these three different worlds. So we're going to talk about how this plays into building a good financial plan, pros and cons, and best way to use each of these worlds. Ryan, welcome in. How's it going today?

Ryan: I'm doing pretty good. How about you?

Ben: I am doing well. Also, I know we're recording this towards the end of the year in 2022, and it's the winter months, but does that mean anything for Irvine, California winter months? Is it just the same as the spring months and the fall months and the summer months?

Ryan: All right, Ben. So this is where I get laughed at because compared to the rest of the country, for the most part, we have some really nice weather here in Southern California, and I grew up here in Southern California, and so this is where my Midwest friends, my East Coast friends started laughing, but I'll share this with you. When I was a kid growing up, I really found the winter months tough. I don't know if you've heard of that thing called sad, which is seasonal effective disorder?

Ben: I think so.

Ryan: Yeah. I really think that I suffered from that. When it was dark at five o'clock or I didn't get a chance to get outside all day. And I really do think it that it had an impact on me. And I know it sounds weird because again, this is southern California, so it's not like we're snowed in or it's freezing cold here or anything like that. But I definitely think that it had an impact. But I'll say this, as I've gotten older, I really don't notice that at all. And in fact, I actually enjoy the winter months here more when it dips down to that really cold 55 degrees or something like that compared to the rest.

But the other thing, actually, when I was a kid, even though I didn't like the winter months, I did like going skiing, but I would go skiing quite a bit in the winter because you could get to the mountains pretty quickly here in Southern California. But I don't know, probably when I was about 20 years old or so, I just decided that yes, I like skiing, but no, I don't like cold. And the fact that I didn't like cold went out and decided I'd rather spend more time on the beach playing beach volleyball and doing things like that.

Ben: That worked out better for you in the long run too, the beach volleyball?

Ryan: Yeah, I will say so. Still dealing with this little shoulder issue, but keep me off a little bit. But I'll be back.

Ben: It's interesting about your body because I've lived in the cold weather and I lived in warm weather and it took me some time to adjust, obviously to living in the northeast and the cold. But over time your body does adjust so you get really comfortable with it and the opposite happens. Your body can't handle the heat as much, but I imagine if you're just breaking away from that crisp 60 degree evening in winter to the mountains, it can be a bit of an adjustment period for sure. But what's great about Southern California though is that you can get to so many different places and experience a bunch of different weather without having to travel too far.

Ryan: Yeah, it is nice. I mean, you could be at the beach or you could be at the mountains all the same day.

Ben: Yeah. Well, that's really cool. I asked you that thinking winter probably doesn't feel a whole lot different, but with the time change and with the darkness and all that at all, we all have to experience that. So it is interesting to see how Irvine and how you and the family enjoy the winter months now compared to prior years. So thanks for sharing that, Ryan. I want to jump into our topic today on three worlds of money. And again, when you really think about investing, there's really three places you can separate your money out too in terms of investing. You have the banking world, the insurance world, and the Wall Street world.

So we want to talk about the role that each of these play and a good financial plan, and Ryan will share the best uses some pros and cons and maybe some mistakes people make with each of these. So Ryan, let's kick it off with the banking world. I think this is one that most people are very familiar with saving and checking accounts, but what are some of the best uses of this?

Ryan: So when it comes to any of these worlds banking world, insurance world, Wall Street world, which we'll get into if you're retired or you're planning to retire soon, meaning in the next five to 10 years, there's probably a very good likelihood that you should have money in all three of these places. It's just a matter of how much, and there's pros and cons to all of these. So yeah, starting with the banking world, this is what we're all familiar with. We've got our checking account, our savings account, maybe CDs, that sort of thing. And really the main reason to have money in this is really the main reason is to handle our monthly bills. We don't want to keep too much money in these accounts because they're not going to earn much interest, but it's there so that we can just pay our bills.

And then we have money in savings. Where are you going to want to keep some money? Typically, money that's going to be there just to be able to handle what I call the emergency reserve. So these are for those things that just inevitably come up, such as the car breaks down, the roof leaks, something else where you just need to get some cash real quick in order to pay those expenses. So they're not things that are completely unexpected. I mean, different things like that do come up. So you got to have some money there, and for most people, I'll recommend that they have anywhere from three months to as much as 12 months of money sitting in their savings just to handle these types of emergency reserves. And that depends on your age, your family situation, your income, your other assets. If you're working, how stable is your job. So there's all kinds of things there that we need to consider.

Ben: When you look at the pros and cons, is it really as simple as the pro are, you have the safety of the banking world and the cons being you just don't gain a lot of interest on it? Is it as simple as that, or is there more to the pros and cons?

Ryan: Definitely. I mean, one of the big pros is you can access that money right now today. I mean, you could walk into the bank at the bank's open right now, and you can get some money there. Or you can go to the ATM machine or you could just swipe your debit card somewhere and you immediately have that cash available in order to again, just handle your regular bills as they come in. The other big plus again is that it is completely liquid and you're certainly not going to lose any money in the markets or anything from it. It's completely safe at the bank.

The downside, of course, is that you're not going to earn a whole lot of money on the money that's in these accounts. Fortunately, this year interest rates have come up a little bit on banking products, but certainly not as much as you could potentially get in the Wall Street world or as you could get in the insurance world.

Ben: Well, let's talk about that insurance world then. We're obviously familiar just with what that means, but what are some of the best uses of insurance when you're trying to build your financial plan?

Ryan: So there's a couple of different things that stand out. One of them is life insurance, believe it or not. So there's certain types of life insurance that if structured properly and if funded properly, can be a good way to grow money for the future. So those specific plans are funded after tax and there's virtually no limits as to how much you can put into them, and you can also take money out of them tax free if done correctly. It's done via loan, so you got to know how to do that correctly. The catch here though is in order for this to really work well for you, you likely needed to set it up when you were under 50 years old because if you set it up older than that, typically the cost of insurance inside of these products really doesn't make a whole lot of sense to utilize.

But if you're retired or soon to be retired and you've set up one of these in the past, it can be a good resource potentially to get some tax-free income in retirement. The other thing that really stands out, especially for retirees and soon to be retirees, are annuity products. So there's different products here. Some include MYGAs, multi-year guarantee annuities. Another one is a fixed index annuity. So the nice benefits of these is that you can earn a reasonable rate of return on your money and not have to worry about losing any money in the stock market.

So as an example, MYGA, stands for multi-year guaranteed annuity. There's various products, but for instance, one of them is a three-year annuity. You can get a 5% interest rate on your money, so 5% per year for those three years. There's other ones that are like five years. There are one I think is paying 5.4% right now per year. So that's a guaranteed rate backed by the insurance company. And these are similar to a CD. All those CDs of course, are with banks, but these are with insurance companies. So there's that.

There's fixed index annuities, like I mentioned, and with that, you get to participate in the upside of a market index without the downside risk. So quick example, one product today has an 11% cap and a 0% floor. So what that means is, let's say your money is tied to the S&P index within that index annuity. If the S&P is up, let's say 5% for the year, you'll get that full 5% because it's less than the cap. If the S&P is up 10% for the year, you'll get that 10% because again, that's less than that 11% cap on that particular product.

But if the S&P is up, let's say 20% for the year, you won't get that full gain. You'll get 11% as well, because that is what the cap rate is. So you won't get all the upside when the S&P in this case does really well, but you won't get any of the downside either when the S&P goes down for the year. So the S&P goes down 20, 30, even 40% like it did back in 2008, the worst case scenario is that you'll get a 0% rate of return, so you just won't earn any money.

Ben: Very good. Well, what are some of the biggest pros and cons though than when you were looking at insurance?

Ryan: So the biggest pros I would say is again, that you can earn a reasonable rate of return on your money and it's safe. I mean, it's backed by the insurance company. Certainly you want to go with an insurance company that is solid, that has a good history, good reputation, and so that's important. One of the con, for instance, when we talk about the annuity products is that the money that's in there is not fully liquid. So unlike let's say a savings account where you can access right away, you can access all of it, no problems, no penalties, in annuity, there are premature withdrawal penalties. So they call it a surrender charge.

So let's say we're talking about that three year fixed annuity. So after three years it's a hundred percent liquid, but before the three years, if you want to access the money, depending upon the particular product, you may only be able to access, let's say, 10% of the account value on an annual basis. Now, a lot of them have other provisions as well. If you had to go into a nursing home or if you were diagnosed with a terminal illness, that you would be able to access that money without having to pay any penalties. So there are some ways there that you would be able to access that money without penalty.

Ben: What are the biggest misuses then if we look at insurance? I mean, what are some ways that people make mistakes when they're investing in the insurance world?

Ryan: Well, certainly when we're talking about annuities as an example, if you're more than 10 years or so away from retirement, I find very few reasons why somebody should have money in annuity product. The other thing is going back to the surrender charge or the penalty period, you want to be careful as to how much you're putting into these types of products as well. And that's really what we're talking about today is for most people it makes sense to have a blend of all three of these worlds, the insurance world, banking world, and Wall Street world. Not all your money is going to be in just one of these worlds.

Ben: So let's take that then the third world then, so we can finish out the conversation on the three worlds and how you structure your investments. We have the Wall Street world. I think we're all, again very familiar with this stocks, and this seems to be the more aggressive approach to things, but what are some of the best uses here?

Ryan: Yeah. So definitely, I mean, pretty much everyone is familiar with the Wall Street world with stocks, bonds, mutual funds, exchange traded funds, all of this. And if we're talking about equities, for instance, equities meaning stocks or mutual funds that own stocks or ETFs that own stocks, that sort of thing. Even if you're retired or you're planning to retire soon, there's probably a very good likelihood that you should have some equities within your portfolio. I had these conversations quite a bit. It's like, "Hey, I'm 70 years old. I don't think I should have money in the Wall Street world. I can't take that risk." There's all kinds of risks when it comes to retirement.

I mean, one of them is market risk, and that's certainly losing money in the markets. Another one is inflation risk, and that is not keeping up with inflation. And if we don't keep up with inflation, then we're not going to keep up with the cost of living. So it's a matter of having the right blend of all of these. If you're 70 years old, you could very well live another 10 years, 20 years, maybe even 30 years in retirement. So there's a very real need in order to have some money that's allocated in such a way where it will help you to keep up with inflation over the course of your retirement.

Ben: So pros and cons then. What are we looking at for Wall Street here? Is risks the main con here and break it down for us?

Ryan: Risk is definitely a big con, that's for sure. I mean, if you're retired and you have a lot of your money in the Wall Street world and specifically you have a lot of your money that's invested more aggressively, that can really put your retirement at risk also. Because if the markets do go down and a lot of your money is tied to the performance of the stock market and you're at a point in your life when you're needing to withdraw income from that portfolio, that puts you at very real risk of running out of money. But one of the other pros, really of the Wall Street world, although money that is in the Wall Street world fluctuates day-to-day, that money can be accessed at any time without penalties, at least the way that it works with me and my clients.

Now, you can't access the money the same day. It usually take a few days to have access to it, but it can be accessed very quickly. There's no premature withdrawal penalties or things like that. Now, when I say there's no premature withdrawal penalties, I'm talking about the investments and things themselves. Of course, if this was an IRA account or some other type of retirement account where you have to be 59 and a half in order to access or something like that, that's a different story, but I'm just talking about the investments themselves, can be accessed without penalty.

Ben: Any key mistakes people make here? I know you've touched on a little bit of that, but is there anything else that you might highlight from the Wall Street world that is a spot where someone might misuse this money?

Ryan: Yeah. I see this on two extremes. I see the one extreme being someone that wants to invest more aggressively than what their risk capacity is. In other words, somebody might have the risk tolerance it seems in order to invest more aggressively, but they may not really have the risk capacity to do so. In other words, if they did suffer a major loss, it would have a huge impact on their retirement plan. The other thing that I see though is I see people that are invested far more conservatively than they should be. I mean, they should really be taking a little bit more risk because they're taking so little risk within their portfolio. It's just not going to keep up with the cost of living over time.

Ben: All right. Well, it's a good breakdown of the three different worlds. I mean, if you have questions about this and maybe how your plan or your investment portfolio is structured and want to get some feedback and see if you're maybe properly allocated, best place to start is cravitzfinancial.com. That is the website there. You can also get your retirement ready checkup done as well to give you a snapshot of your current financial picture. And if you want to call, you can do that as well, 1-714-462-9155 is that number.

But hopefully this gives you a little bit better understanding of how the investments work and where you might want to allocate your money and the pros and cons to the different worlds that are out there to be used. But as always, your advisor can sit down with you and help build that plan to meet your needs and your goals. Ryan, as always, it's good to catch you up with you and we'll do it again soon.