Money Talk with Carl Stuart

Carl Stuart and Jimmy Maas bring a special episode of Money Talk on how to pass wealth tax-efficiently to your heirs and how to maximize your tax advantage.

The full transcript of this episode of Money Talk with Carl Stuart is available on the KUT & KUTX Studio website. The transcript is also available as subtitles or captions on some podcast apps.

KUT Announcer: Laurie Gallardo [00:00:01] This is a special broadcast of Money Talk with Carl Stuart. He is not live this week so he’s not able to take your call. Text anytime though and your question could be answered on a future episode. Carl Stuart is an investment advisor representative of Stuart Investment Advisors. Now, here’s Carl.

Carl Stuart [00:00:21] Welcome to Money Talk. I’m Carl Stuart and you’re listening to KUT 90.5 and the KUT app. We have a special, special edition this afternoon. What I like to call an evergreen show. This is an opportunity for me to answer questions that I’ve been asked throughout the years and that maybe I can have more time to answer them. I’m here this afternoon with my good friend, Jimmy Moss, president, executive officer and chief of everything good at KUT. Kenny. I’m I called you Kenny! No, you did. You did. Jimmy!

Jimmy Maas [00:00:55] I’m going to keep that in just for it.

Carl Stuart [00:00:58] Or Kenny. Because you’ll be listening. So, by the way, let me just say, do not call or text this afternoon because I won’t be able to answer. But next Saturday at five, actually after the news at five, I will be back and you have the opportunity to listen to your questions to do my best to them.

Jimmy Maas [00:01:17] All right, Carl, I have a question. Yes. I’m kind of theming all these questions kind of in the realm of the two inevitabilities of life here, death and taxes. Yes. That’s right!

Jimmy Maas [00:01:32] As you say many things, we can’t predict the future, but we can safely predict two of those things will come a calling at some point. Absolute. Tax-advantaged investing versus regular investing. If taxes are percentages, and they always are, well, I can’t say always, but often more or less the same. Yes. Why worry about tax-advantage investing? If you’re gonna pay the tax at some point.

Carl Stuart [00:02:03] Anyway, yeah, I, you know, that’s a terrific question because when I first got into this profession, it was the, it, was just accepted that you put as much money as you could in pre-tax IRAs, SCP IRAs 401ks, 403Bs. And the theory was you’re going to be doing this during your working lifetime. So you’re gonna be in whatever tax bracket you’re in, but when you take the money out, when you retire. You’re going to be in a lower tax bracket. So there’s a, the fancy term is tax arbitrage. Let’s pretend I’m in a 24% bracket when I’m working to make it extreme. I’m at the 15% bracket, when I retire. So having that money grow over that time and then take it out at a lower tax rate was the idea. Now, as I’ve said before on Money Talk, as our elected officials say, my views have evolved which means I’ve changed my mind. Because what I saw happen was people would spend a working lifetime doing this. Thank goodness they did. But then there would come time to retire and they discovered that they did not necessarily fall into a lower or meaningful lower tax bracket. They might fall from 24 to 22%. They never fell from 32 to 15. And so I remember many years ago talking with a person, he had spent his life. And I think Exxon had a big, big multimillion dollar 401k and he was really frustrated because he had to take that money out. Uh, and he didn’t cause he had required minimum distributions and he had to pay income tax on it. So what I think is if you have an employer sponsored plan and the employer makes a contribution, not your money. Their money and that’s very common in what are called employer-sponsored defined contribution plans. Let’s say your employer matches your contributions up to five percent of your compensation. Should you participate? Absolutely. You should put five percent in because you just got a hundred percent return on your investment. Should, you put in seven, eight, nine, ten percent as used to be the common thinking? And I think that depends because if you went over, Let’s see, let’s just see. You have a Jimmy 401k with a 5% match. You put your five in, then you come over here to what we call the Jimmy taxable account and you make your investments over there. Over your career, over your working lifetime, you build two pillars of retirement savings. The benefit of that second pillar is if you have an emergency and you need to take money out, you don’t have to pay income tax on it and if you’re under 59 and a half, you don’t have to pay a penalty. You pay what, long-term capital gains tax rate, which is dependent upon your income tax rate but it’s lower than your income rate. So you have this pool of taxable capital over here and then over here you have your 401k, you retire, you take that 401k and you roll it into the Jimmy IRA and you take the money as you need it or eventually the government’s gonna require you to take the the money. Whereas this other pool can continue to grow and you can get at it when you want or not. So I think if I were in a plan and it had no employer matching contribution, I would have to think long and hard about participating. I would had to have a pretty basic belief that I was going to be in a meaningfully lower bracket when I took the money out, retired. And that I’m not gonna need the money so I’m gonna worry about being penalized by taking it out before I’m 59 and a half. If that makes sense, fine, go ahead and do it. But if there are questions about that and you have the discipline to invest, invest it on your own. Now, the key word there is discipline because Americans are great consumers and lousy savers. And the benefit- I’ve not heard this. This is a blasphemous charge. What are you? This is recent people listen to money talk because I’m so incredibly brilliant. I don’t understand, Carl, what you’re talking about. So the benefit of the 401k is it comes out of your paycheck and now governments realize they now have plans that have what’s called a negative election. You go to work at KUT and you sign on to the plan and unless you say I don t want to, they immediately sign you up for four or five percent. Of your comp going into the plan and many plans now will raise that by one percent a year figuring you won’t notice it it’ll be much to your benefit. If you’re that unusual American who can do that on his own then everything I just said is entirely relevant.

Jimmy Maas [00:07:07] There are too many things out there to distract my mind to where I don’t, I’m not sure if I could do that, but that is a question I’ve often had about why people are so, I mean, I understand upfront, it seems like a great idea about the tax advantage savings, but I think in the long-term, also depending on the kind of accounts that your employer has access to. Once I worked at the Wall Street Journal they had. Outstanding funds that you had and a massive library of them, tons of options, but it wasn’t the same as some other smaller employers that don’t have access to the same pool of things.

Carl Stuart [00:07:50] Same pool of things. Right I mean the larger the employer the more money in the plan the more they can spread out the expenses of that so it’s cheaper and they can have if they choose a more robust selection and you pick a wall street journal where you got a lot of people who are in finance they’re probably going to be demanding that they have that whereas you know that you make an interesting point there was a lot information data if you will the people simply were not really thinking what they were doing with the plan money. There was a time where they saw a lot of people who were just sitting in cash, which is a very bad idea, or they were sitting in company stock. Well, when Enron blew up years ago and all those people were wiped out and they had hundreds of thousands of dollars in the plan, Wall Street, I think at the urging of probably the department of labor came up with these things called target date funds, which

Jimmy Maas [00:08:44] I find to be very useful as a tool. Yes. You just, you know, this is about when I’m going to be done. Yes. Also, you can game it like if you, if you want to be more aggressive and you think you’re going to retire in 2040. Yeah. But you want to pretend like you’re a 25 year old, you roll the dice a little bit, put that 2060 out there.

Carl Stuart [00:09:05] And that’s, I completely agree with that. I had a call this recently on Money Talk where a person said she or he was 65 and wondered if they ought to get more conservative with their investments. Again, conventional wisdom was yes, my thinking has evolved.

Jimmy Maas [00:09:22] We’re living longer. We’re doing all kinds of things that.

Carl Stuart [00:09:26] I mean, we lived in 95 and 65, you have a 30 year track, you can’t put everything, well you can, you’d be making a mistake, putting everything in cash or CDs or bonds. Or in a bag on your mattress. Exactly right, because back to your earlier comments, we don’t know how long we’re gonna live, but we’re going to die, but we also don’t know what’s gonna happen to the cost of living, but it’s a pretty good bet it’s gonna go up. And we don’t know what our return on our investments are, but if we stay in cash or bonds, we’re pretty sure they’re gonna be very modest returns.

Jimmy Maas [00:09:59] You keep saying the government will force you to take. What is that threshold? And is that just a sign you’re doing all the right things? I mean, essentially like you’re doin’ too well with the way you’ve made your retirement choices.

Carl Stuart [00:10:12] Well, I’m going to assign a pernicious motivation on the part of the government, which is they let you put that money in there tax-free. They let you grow it tax- free. By golly, they went their taxes out of it. So they’re going to make you take the money out, whether you like it or not. It’s called the required minimum distribution. Back in the day, it was 70 and 1 1 half years of age. They have, because people, to your earlier point, are living longer. It’s around 73, 74, and presumably will continue to go up incrementally because of that. But every year, your custodian from your IRA will get, will know on in the first week of January, how much that is, because it’s based on the December 31st value of your IRA, right? And, and, and they, they know that value and they come up with a factor, which is a percentage that has to come out every year. So, the theory is you’ll have it all out before you die. I’ve never seen that happen. If it’s properly invested, you’re still gonna grow what’s left in there. And then, when you die, if you are married, your spouse, unless he or she signs off on it, gets the money. And if they don’t spend it all, then the other beneficiaries, grandchildren, children, whomever, they get the money, they’re subject to required minimum distribution, whether they want the money or not, they’ve got to take it out within 10 years. Used to be over a lifetime, now it’s 10 years, so now you have this period of time that you have to take the money out. In the old days, let’s say you inherited your mother’s IRA and you were 52 years old and you lived till you were 87. You had a long time to take that money out, it would actually grow more than what you were taking out. Well, they didn’t like that so much, so now you have to take it out within 10 years. And, you know, that’s the rule, but it does cause people to think about something else that has been a constant question on Money Talk, and that is, should I take that money, that I’ve worked, I had a 401K, I retired, I put it in an IRA, I don’t know that I’m gonna need all this money. Should I take some of that money, or all of it, and convert, that’s the term, convert it to a Roth IRA? Why would I do that? So, a Roth ira, when you put the money from your IRA in there, it’s a taxable event. The money grows in the Roth without taxes. Once the initial investment is spent in there five years, and you’re over 59 and a half, which presumably you would be, You can take the money out, guess what, income tax free. And this is the big deal, there’s no required minimum distribution. Now, now we’re talking. So you don’t need all that money and let’s suppose you’re married, you predecease your spouse, she gets the money, no required minimal distribution. She doesn’t spend it all, the kids get the money. Now there’s 10 years to take it out, but it comes out income tax free. So I just deal with this all the time. The question is, am I willing to pay the income taxes today for that future benefit, tax deferral growth and tax-free withdrawal and no required minimum distribution? And I would tell you, I’ve seen it go both ways. I’ve see people say, look, I don’t wanna pay the darn taxes, let my heirs pay the taxes, full stop, great. Others say, look, you know, this is a legacy, I’m not gonna need all this money, I’ll do the Roth conversion. Maybe I’ll hold back enough to pay the taxes on it so I don’t have to impact my lifestyle. And we’ll build this pool of capital on a tax-free basis. So you’re gonna pay the tax either you or your heirs are gonna pay taxes. Pay it now, build this Roth up, or don’t build it up and let people pay the taxes when the money comes out. Well, you’re listening to Money Talk on KUT 90.5 and the KUT app. Having a lot of fun this afternoon on an Evergame broadcast, stick around, we’ll be back.

KUT Announcer: Mike Lee [00:14:37] If you’re a regular KUT listener, you know by now that member support makes everything we do possible, and you know all about becoming a sustaining member, but you might not know about another way to support the reliable news on KUT. If you have a donor-advised fund, you can support the station by recommending a grant to KUT! It’s a great way to show your support and to help ensure that KUT is your reliable news source, and it is way easier than it sounds. Find out more at KUT dot org slash legacy.

KUT Announcer: Laurie Gallardo [00:15:09] Welcome back to a special edition of Money Talk with Carl Stuart. Just a reminder, he is not live this week, so he is NOT taking calls for this show. Now back to Carl, joined by KUT’s Jimmy Maas.

Carl Stuart [00:15:23] Welcome back to Money Talk. I’m Carl Stuart and you’re listening to KUT 90.5 and the KUT app. This afternoon, a special broadcast, what I like to call an evergreen broadcast, my friend, Jimmy Moss and I are here doing this together, looking at questions that are common to a lot of people and giving me the ample opportunity to answer them. James? Yes.

Jimmy Maas [00:15:47] To continue on this sort of death in taxes, you kind of hinted at, in the last response about how heirs might bear that tax front. So let’s talk about probably the most common thing you might get from a deceased parent or relative. Uh-huh. Property. Yes. Um, so I know you’ve said this before, um, and you don’t like to see, uh, your house as investments because you like to say you have to live somewhere. You don’t want to live in your car. Right.

Carl Stuart [00:16:25] That’s what I always say.

Jimmy Maas [00:16:26] And while real estate has been very attractive as a value asset over, we’ll say, the last 25 years in Austin, specifically. But how do you view inherited property as, because it’s not your house at that point. We’ll presume it’s your house. In some limited circumstances, it might very well be. But if you, a more. A standardized situation was you inherit a house from a relative and it is now yours. Or we’ll get into shared. Right, yeah, that shared airs

Jimmy Maas [00:17:07] Shared heirs, but it is yours. Yeah. How would you handle that in a like? Can you get it out? Yeah.

Carl Stuart [00:17:17] How would you handle that?

Jimmy Maas [00:17:18] Yeah, how would you handle that in a way that is most advantageous to you? Do you cash out, put it all in stocks, or what happens at that point?

Carl Stuart [00:17:29] Well, first of all, this is, if there is such a thing as a good tax law, this is it, which is when you inherit assets. Now we’re talking about, say, your parents’ home because they both passed away and you’re the sole beneficiary, but the rule that I’m about to tell you about is true if you inherited mutual funds from them or individual stocks or bonds, not in an IRA, but in their name. There’s something called the step up in basis, B-A-S-I-S. And what it says is, when you inherit what we call a capital asset, like a piece of real estate, the cost basis of the decedent, which perhaps bought the house 25 years ago, that cost basis disappears and your cost basis of the inherited property is the value of the time of their demise. So, let’s suppose they bought a house in Austin, Texas. For $100,000 and the most recent data indicate the median house price in the Austin metro area is $450,000. Okay, there’s $350,000 again. Your father’s gone, now your mom passes away. You get this house, you sell it for $450.000. The taxes, zero. Zip-a-dee-doo-dah.

Jimmy Maas [00:18:54] No taxes because the value on on the at the point of their their passing yes that is what that is where your cost basis where your yes your value begins exactly you don’t get a game from the original purchase right now you’re

Carl Stuart [00:19:08] Purchase price or pay on the game. That’s the beauty of it now. I mean, it’s all sorry. Yes

Jimmy Maas [00:19:13] You do get the game, but I’m sure you don’t pay on the game from 100,000 to 450,000.

Carl Stuart [00:19:18] Now, we call it a word of caution. We call it the step up in basis. But the fact is, it can be a step down in basis, I mean, I was lived through the real estate collapse in Texas back in the late 80s and 90s. And you could have inherited a piece of real estate that was worth less than somebody paid for it seven or eight years earlier. But that’s the deal. So if you inherit a mutual fund portfolio, that’s the easy one, because the trades every day, the custodian is going to be able to tell you. What it was worth on the day that the person passed away. In fact, they will open an account in Jimmy’s name, they will transfer the securities to Jimmy, and they will update what’s called the date of death valuation. In the case of real estate, if it’s a residence, you get an annual appraisal. I don’t think you have to go out this time. I’m not a lawyer, but it seems to me reasonable that you don’t have to get a new appraisel when you have a third-party, arms-length appraisale from the, in this case, Travis County. Uh… Property tax people

Jimmy Maas [00:20:17] You can also I think you can also get like your real real estate agent if you have sure to give you a comp in the area sure thing. Sure, sure. So

Carl Stuart [00:20:26] inheriting assets which have appreciated and which are not in a retirement plan is the best way to pass on wealth. The next would be something we talked about before the break, Roth IRA, tax-free distributions. Those are two really tax-efficient ways to pass Now remember that if let’s just take a married couple and they’ve invested in stocks and bonds, and the man, because men tend to die first, passes away. If the surviving spouse gets a step up in basis, let’s say it’s a female, she doesn’t spend it, it continues to grow. She lives another 10 years. She dies another step up a basis. If your parents are in their home and they choose to sell it during their lifetime. And they’re both still alive, the first $500,000 of appreciation over their cost basis is not subject to tax, and then the rest is. Now, we live in central Texas, where in spite of the crash of real estate in the late 80s and 90s, we’ve had fantastic growth that we had. Right now, real estate, I’m talking residential, has been declining year over year, about 3% a year, and the market’s soft, houses are on the market for a lot longer currently. But people who bought houses before the 40% jump during COVID have big unrealized gains.

Jimmy Maas [00:21:55] You know, people that are older, they may have purchased in, you know 1978. Or, you now, and they are sitting on a, and depending on where they bought, that is a huge, and if they decide to sell, they could easily eclipse that $500,000 limit. Oh, without question. Yeah, for sure. So, still staying within my theme, my death and taxes.

Carl Stuart [00:22:19] Can I interrupt you? You brought something up in passing that I’ve observed. You, let’s say you have two sisters and a brother, okay? So there’s four of you in the family. Let’s further say that you grew up and your parents bought a lake house, okay. So now, both your parents are gone, and you say, oh, lake house. I have such fond memories of that. Let’s keep it. Your sister says, you can’t be serious. That’s worth a million dollars. I want my 250,000 bucks. And Your brother says, I don’t want to sell it, but I can’t afford to buy our sister out. Now you got a problem, a real problem. So my life experience advice is, if you have multiple beneficiaries, doesn’t matter whether they’re siblings or not, if it’s a piece of real estate and everyone doesn’t agree on the disposition of the real estate, it may be better off to dispose of it before. You have to go through that because it can tear apart a family because not everybody is the same about money, about saving, about investing, all of those kinds of things. It’s different than a house where all four of you aren’t going to move into the house.

Jimmy Maas [00:23:40] That, that is a, um, yeah, a cautionary tale. Yes. Um, I mean, we see it all the time in, in, in various pursuits, the mom and mom and pop businesses, all of those things. They don’t get divvied up as equally as we think they might. And they’re not the fortunes that we assumed them to be when we were dreaming of them. Well, there’s.

Carl Stuart [00:24:03] Yes, well, there’s absolutely people who are business founders, and you’re looking at one. We tend to have an extremely inflated value in our mind of what the practice is really worth. Ha ha ha! I don’t know.

Jimmy Maas [00:24:16] Uh, value is what people will pay. That’s exactly right. Um, all right. So you have, so, uh, using still as this house as a, an inherited home, as a pillar, um, real estate, historically, not, not, uh maybe not in the last six months or year, uh but historically in Austin, real estates got done pretty well.

Carl Stuart [00:24:41] So let me interrupt you and say this. I’ll make it across the country. I’m always fond of saying this because the data bear me out. There are two asset classes which historically, over long periods of time, appreciate more than the rate of inflation. You’re gonna cut me off here. Income producing real estate and stocks. Not residential real estate.

Jimmy Maas [00:25:04] So knowing that this is how you are approaching this, this is what I was going to ask. Okay.

Jimmy Maas [00:25:11] As an heir, as the heir, we’ll just presume the single heir that has to make this decision. Do you sell the house, liquidate and go all into some other investments, liquid investments like stocks? Or do I stay illiquid in something that I can less impulsively divest myself from and be a little more long-term? In my thinking, I don’t know where you come down on that type of- So you would-

Carl Stuart [00:25:46] So in that hypothesis, you would turn that house into a rental property.

Jimmy Maas [00:25:51] Into a rental property that can produce some income. It may not be the cash cow that you think it is because of taxes and other insurance and other problems that come with owning property.

Carl Stuart [00:26:06] How do you come down on that type of thing? So, I’m telling you a story. Back in the 80s, everybody I knew was somehow connected with Central Texas Real Estate, whether they were real estate brokers or they were lawyers getting in their clients’ deals or doctors getting in deals, architects getting in deal. I couldn’t stand it. I said to my wife, I think I may have made a career mistake. I should have gotten into real estate. So I had two buddies. So we thought, we got to get in the game. So we bought a rent house. East 32nd Street within a walking distance to the University of Texas. Now people said, Carl, you can’t lose on this. There’s always 50,000 students. We’re not going to make another acre of real estate in the 40 acres. It’s a great deal. So we did it. The rent went, the rent when we bought it was $1,600. It went to $800 a month, but I noticed that the mortgage didn’t change. The property taxes didn’t drop by 50%. The property insurance didn’t. When we had to replace a washing machine, we still had to pay retail prices. So I’m reminded of that old joke about the boat owner’s two happiest days of his life. The day buys it and the day sells it. So here’s my, and I had this conversation very recently with someone, there are two kinds of people. They’re the hands-on, do-it-yourself people, and they’re the others. The people who make money over years in income producing real estate have two characteristics. They don’t have a lot of debt. On the property, because you got to pay the interest whether the mortgage suffices or Which would be the example here. Yes. Yeah. So that’s number one, the level of debt. And secondly, the personality of the owner, because I know people who actually gain, they enjoy it. They enjoy buying rental properties, they enjoy kind of fixing them up, fooling around with them, collecting the rent. They can hire a property management that takes away some of the rate of the return. For the rest of us… Don’t do it. It’s like taxes, you can do your own taxes, you can turbo tax if you have a very straightforward, simple situation. Decades ago, Mr. Smartypants here, I did my own taxes and I got that letter you get, hopefully you’d never gotten one. It says in the upper left hand corner, Internal Revenue Service. If you don’t think your blood runs cold when you get that letter. And I was subject to an audit and I had made some mistakes in my preparation. And I thought to myself, that’s it. I don’t want to do this again. I want somebody to stand either beside me or in front of me with the IRS. I am not a do-it-yourself person. And I was so glad to get rid of that house. So yes, the reason income producing property works is because over time, because of inflation, rents go up. At the same time, your debt gets taken care of. It’s called the feast. The debt goes away. The rents goes up. That creates what? Greater value on the piece of property. So you have both income net of expenses and rising value because of rising rents. That’s why it works. The reason the stock market works. And I say this ad nauseam because it’s human ingenuity. The iPhone didn’t exist until 2007. So you are betting on human ingenuities when you invest in the equities and you were betting on rising rent when you invested in rental properties.

Jimmy Maas [00:29:35] Uh, yes, that is true in a typical investment scenario in this, uh, inheritance scenario. Yes. Do you see an asset tracking the stock market?

Carl Stuart [00:29:47] Very different, very different. Cycles are much different. Stock market cycles are very short, and real estate cycles are very long because of supply and demand. Right now, the challenge in the United States with residential real estate is we’re not building any. And so, the other side, and this is recently, that’s where I’m going. High interest rates means that people who qualified for a 3% mortgage, sure as heck, do not qualify for a 7% mortgage. So you have less demand. And you have less building going on, and recent articles in the Wall Street Journal suggest kind of what’s happening in central Texas, prices are softening, and homes are staying on the market longer. One of the things I’ve observed about, particularly with people’s homes, we love to mark up the value as it goes up in our mind. We don’t like to mark it down when it goes down. We like to whine about our property taxes, but if we become a motivated seller and we think the house is worth, 750,000 when the market says 675. By golly we’re going to sit on that market for about nine months until we’re unless we’re forced out of town to get a new job we don’t like marking down the value of our homes to what the reality is. You don’t have to worry about that in the stock market you don’t get to choose what is worth. The world tells you what it’s worth every day. Yeah, this is a

Jimmy Maas [00:31:08] It’s just a it’s a fascinating because on paper these things track similarly But in maybe in real life

Carl Stuart [00:31:18] Yeah. Sometimes they coalesce like the global financial crisis and the mortgage crisis. Everything went to heck in a handbasket. But there are periods of time where like in 2023, 2024, the stock market outpays the real estate market, just did. Now there’s a lot of uncertainty in the real-estate market around mortgage costs, supply and demand. There’s uncertainty in the stock market about tariffs, rising interest rates. I mean, lots of uncertainty wherever you look. Both of them work over long periods of time, but when real estate went to heck in a handbasket in Texas, it was five, six, seven years of decline before supply and demand came back into it. The typical bear market in the U.S. Equity market is probably 12 to 24 months, and the average up market’s longer than that, considerably, so you have to understand that liquidity matters. In bad times, people can liquidate stocks. They can’t liquidate. Real estate near leases

Jimmy Maas [00:32:21] One, another question from an air perspective, I have, hypothetically, I have a bucket of money that I have inherited from the most tax advantaged way for me, we’ll just say it’s, we have, I’ve $20,000 to invest. That’s a made up number. I do not have that. Don’t come to my house. $20,000 in cash. I have 20,000 of new found bucket of money that my great, great, great, uncle has just left me. I Have some revolving debt over here. Do I try to beat? This might be an easier question to answer now with interest rates a little bit higher, but do I try to in maximizing my investment and trying to get it all in and get a bet on the come on the stock market, on human ingenuity. Or do I take that bucket of money and just know that I’m getting X return on paying down that revolving.

Carl Stuart [00:33:31] Yeah, yeah. Really an important question because Americans are in debt. So the first question I always ask a person

Jimmy Maas [00:33:39] And revolving debt should, just to clarify credit card, any sort of loan that you have.

Carl Stuart [00:33:42] That you have. You basically have real estate debt mortgages, the average person, automobile debt or vehicle debt and credit card debt.

Jimmy Maas [00:33:51] Yes. There’s also this weird secure loan that you can get a personal loan type thing that you know, I don’t know if I’d know.

Carl Stuart [00:33:59] Run away, run away.

Jimmy Maas [00:34:00] Yo, let’s get texts about them though.

Carl Stuart [00:34:03] So the first thing I asked the person, and this is hard for people to answer psychologically, you got credit card, you have $20,000 of credit card debt. If you paid it off, if we had a conversation a year from now, would you be back in credit card debt? Because there’s a reason you got a credit card. The odds are it’s because you spent more than you made. Now if you say no, Carl, I had a medical bill I had a $10,000 medical bill, and it’s not gonna happen again. Okay, but if you accumulated credit card debt as a function of your lifestyle, unless your lifestyle changes, you’re gonna get back in credit card dead again. So that’s the first thing. Look in the mirror and see. So let’s assume that…

Jimmy Maas [00:34:55] I’m bad with change. I’m probably just going to keep.

Carl Stuart [00:34:58] That’s exactly right. That bucket’s going to continue to be filling up. Because credit card debt’s the worst debt because it might be 20%. You’re not going to make 20% year over year in the stock market. Secondly, the assets, there are none. They went to Starbucks. I mean, you consume things. It’s not like your house where at least you hope the house will appreciate while you pay the mortgage. The minute you buy that $60,000 Ford I know that’s a cheap Ford 150. Guess what we drive it off a lot what happens it begins to be forty five

Jimmy Maas [00:35:29] $45,000 exactly right

Carl Stuart [00:35:32] So in, if you said, how do I get financially independent with the exception of mortgage debt for personal residents, when you retire, it doesn’t matter. If you have a lot of assets, if we have a lot of liabilities, the net numbers the same. If I have a hundred thousand dollars in my 401k and $50,000 in vehicle and credit card debt, I really have a $50 thousand net worth. Cause I still got to pay the debt, even if I’m not working any longer. So the dual track is to reduce and eliminate debt over a working career. While adding to your savings. So you’re reducing the liability side of your balance sheet. You’re raising the asset side of the balance sheet because what people think about, unfortunately, is I’m working, I’m paying off my credit card every month. Everything’s fine. And then you look and say, but when you retire, your expenses don’t go away. But your revenues do. So how are you gonna make up the difference? That’s the deal. Well, you’re listening to Money Talk, a great afternoon of Evergreen with my friend Jimmy Moss. It’s time for us to take a break and you’re listen to KUT 90.5 and the app We Shall Return.

Jimmy Maas [00:36:42] Money Talk airs every Saturday at five o’clock on KUT News 90.5 FM on the KUT app and at KUT.org. This podcast is produced by KUT and KUTx Studios as part of KUT Public Media, home of Austin’s NPR station and the Austin Music Experience. We are a nonprofit media organization. If you feel like this is something worth supporting, set an amount that’s right for you and make a donation at supportthispodcast.org

KUT Announcer: Laurie Gallardo [00:37:13] Welcome back to a special edition of Money Talk with Carl Stuart. Just a reminder, he is not live this week, so he is NOT taking calls for this show. Now, back to Carl, joined by KUT’s Jimmy Maas.

Carl Stuart [00:37:28] Welcome back. You’re listening to Money Talk on KUT 90.5 and the KUT app. We’re having a lot of fun this afternoon, a special evergreen show. My friend Jimmy Moss and I are here talking about death and taxes. Yes, so.

Jimmy Maas [00:37:44] Well, I just wanted to close a loop on maybe more of a philosophical loop, because I think we all struggle with this at times in our life. Yeah. Uh, on, I think a lot of times we think of personal finance and, uh, investment advising that your, your bread and butter, um, we don’t think of getting a return on paying down what we owe to somebody else, minimizing someone else’s return.

Carl Stuart [00:38:12] Yeah, it’s what we call in economics an imputed return, because if you don’t pay down that 20% credit card yet, guess what? You’re going to pay it. And so the minute it goes away, you have just had a 20% return because you’re not paying it.

Jimmy Maas [00:38:27] And on whatever you put into it. Yeah, yeah, yeah. So if it to that example that I had a little while ago, is there a metric that you would you invest some and pay down some? Is that kind of where we’re at? Yeah, I think you have to. I mean, I

Carl Stuart [00:38:42] We get ourselves in such a tough place with credit card debt that we need to have a plan where we pay more than the monthly minimum on the credit card debt and we put money in our 401k or our own investment account. We need to do both simultaneously. We just do, we gotta get started saving by investing.

Jimmy Maas [00:39:03] So that way you’re also not expecting yourself to go cold turkey on any sort of habits that you built up over time. Over time.

Carl Stuart [00:39:10] That’s a great point. Habits. We got to this credit card debt because of habitual behavior. So there’s an idea in psychology that I learned decades ago, which is if I choose, if I want to choose to change my behavior, I want to lose weight. I’d like to drink more alcohol and smoke more cigarettes. Maybe not the best thing, but nevertheless. The way to get there is to measure current behavior. So if I wanted to- great habit change. We should look into this. This dude’s…

Jimmy Maas [00:39:42] Forget financial advice. It should go into some sort of life coaching.

Carl Stuart [00:39:48] Drink more. Let me write this down. Drink more and smoke more cigarettes. Then it’ll shorten your retirement planning outlook because you’ll die sooner. Exactly. This is perfect. So here’s the deal. I want to change my behavior. The first thing I have to do is measure my current behavior. So let’s use finance and skip the smoking and the drinking. Okay. So the first thing you do is every time you pull out that credit card and you buy something, you ask. For a receipt. Okay? You keep those receipt in your pocket, your purse. At the end of the week or the end to two weeks, you sit down with all these receipts and you put them in categories. Entertainment, groceries, gasoline, Starbucks, whatever. And you look at them and you go, really? I didn’t know I was spending that much for coffee. I could cut back on that. I don’t have to do that. I can have coffee for free at the office. Wait a minute, I’m spending this much on expensive restaurants, maybe I need to dial that back. Then I start, because every week or two weeks I’m looking at my receipts, I start to see those expenditures slowly but surely, because I am engaging and changing behavior. That’s the fundamental thing. To stand in front of someone and say, eliminate your credit card debts, like standing in front someone saying, I’d like for you to be three inches taller by next Wednesday, it’s not gonna happen. But if you measure Your behavior, if you are sincere about losing your weight, you better figure out what you weigh today, right? You don’t know that if you don’t stand on the digital scales. So that’s the key towards obtaining financial independence. The, yeah, and it’s.

Jimmy Maas [00:41:32] Um, on that note, is it ever, I know the answer to this, but, uh, I sometimes feel like people think it’s just too late, you know, I feel like they’ve missed there. There’s a thinking that they’ve miss the boat. They can’t make a bazillion dollars by the time they’re ready to retire. So they just give up on the whole.

Carl Stuart [00:41:51] You know and and when they think about that that way it it what i’m saying i’m speaking for a friend I’ve given up. I’ve, I’ve given up this is exactly for a friend. This is really for a friend. I get it. I get it too late for me, Carl. I can’t get a bazillion dollars. That’s right. You can’t get a gazillion dollars, but I want to tell you something. It is no fun being old and poor in the United States of America. That is not an objective you want to reach. So all you can do is all you can do because you look at what the social security benefit is. And it’s still, shall we say modest, modest, not enough to live on for a lot of people. And so all you can do is begin to change your behavior. And it may be smaller in the future. It may, under the current assumptions, we’re gonna start depleting the trust fund in the next five, six years. So you’re a young person and you’re having a great time and you are spending 110% of what you make. This will come to an end, but the challenge is we’re human beings. We think in the present. We don’t think about retirement until we’re about 52 years old. We don t think about college education until the kids are 16. It’s a psychological, it’s an emotional adjustment. We live in a country where almost 70% of the world’s largest economy is consumption. Consumption. I grew up with a post-war father. There were no credit cards. If he wanted to buy a refrigerator at Tallarico’s appliance in Keokuk, Iowa, he had to put money away in an envelope every paycheck until he had enough money to go down and pay for it because there was no consumer finance. Then in the 70s, I was in retail, we had something called lay away. You could come in, put money down, put away whatever the item was you wanted, and every paycheck you could come and put money in and until you had paid that off. You did not get the merchandise. Today, you can go out with a credit card and buy virtually anything you want. Make the minimum payments because a credit company would love to keep charging you 20%. It’s a behavioral change. It’s practically un-American.

Jimmy Maas [00:44:06] You just brought up something that I thought I was going to reach bring up earlier, but yeah, it’s sort of it’s it’s not exactly death or taxes. But for many of us, it is inevitable. Children’s education, you bet. You There are many ways to pay for a college. Yes. One is just work, you know, just work and pay it off. Yeah. Unfortunately for most colleges or at least parents that are getting those college bills. Yes. That is extremely, that is much more taxing than it used to be.

Carl Stuart [00:44:47] That’s for sure.

Jimmy Maas [00:44:48] Um, so, um, given that most colleges now, even Texas, the, if you were a tech, uh, going to a state school in Texas, you’re going to pay, uh you know, probably 20 K a year, you know just in, just intuition, you know, so. How, what is the best tact for this? Is this, there’s been a formula forever, a student loan, apply for as many scholarships, you know? If I have saved nothing, again, speaking for a friend.

Carl Stuart [00:45:21] Yes, poor friend. This poor friend, I mean, this guy’s in serious trouble. Bend over, grab your ankles, and…

Jimmy Maas [00:45:33] Let’s say there’s very little in the bank for college and they might have a student starting hypothetically as my friend’s student is this fall. Where to begin with this and maybe as a cautionary tale, you can tell other people who have a longer runway than my friend does for this coming up.

Carl Stuart [00:45:57] All right, this is, this, what I’m going to talk about, I’m gonna get to the options, but it starts with behavior. So, when those children are young, prep, you… Begin to set expectations. Mom and dad are going to pay for in-state tuition full stop. You are going work when you hit 16 and you’re going to give me your paycheck. I’m going to give you back half of it to spend as you please and we’re going put the other half away for I by the way did that Okay, and the kids got to work And when you’re 16, you’re working, you are at the bottom of the flow chart, you’re waiting tables, people are being rude to you, you’re workin’ hard labor, it’s great training. It creates people who are respectful for servers, it creates people to appreciate, this is not what I wanna do the rest of my life. So you start with expectations. This is what we’re signing up for. We cannot afford to send you to the Ivy League, to a private institution in Texas or elsewhere. And if we borrowed the money, then we are now putting serious restraints and constraints on our future financial independence. You have two major goals, your financial, your future financial independence and your kids post-secondary education. The only difference, they’re both equally important, the one is one you can’t postpone. You can’t say to your 18-year-old daughter, honey come back in 10 years and you can go to college, but they’re both equally important. So you start with the attitude by setting expectations. Too many people, because if you’re 15, 16, 17, and the prefrontal cortex doesn’t mature till 26 or 27, you are what the psychologists call a magical thinker. I’m gonna play in the NBA. I’m going to go to Harvard. I’m to do all these things. Maybe I’m not. So there is a setting of expectations that is consistent with your financial capabilities. Number one. Number two, the kids work. They not only work in the summers during high school, they work in summers during college, okay? This is not a time for enrichment. It’s time for the kind of enrichment working in a hot, sweaty place, that kind of an enrichment. Okay, now, now you’re left with where do we put some money aside? They’re fundamentally a choice. You can do something called a 529 college savings plan. Now they call them 529 because they don’t have to be for college. Or you can just invest some money on your own. The 529 allows you to put money in on after-tax basis. It grows, it doesn’t pay taxes, and if you take the money out for a long list of legitimate costs, which include now K through 12, Independence Middle School as an example, tutoring, for example, it comes out tax-free. You have three kids, you can do one for the oldest, and then if there’s money left, you can change the beneficiary. All those are great benefits. There’s they are by and large sponsored by states. My feeling about this, my thinking, you won’t be surprised, has evolved. Not again. Once again, Mr. Evolution. Oh my gosh, I’m gonna, are you waffling? Just call me Darwin. So here’s the deal. I like, you open up a separate account, say, if you’re married, you’re in your wife’s account, call it the education account. You put the money in there. You invested in, say, exchange-rated. Index funds, so there’s no capital gains distributions, very little distributions for dividends. It grows over time. Oh, by the way, let’s suppose you want to buy your child a used car at 16, okay? If it’s a girl, buy it. If it is a boy, don’t. But anyway, you can use the money for that. Suppose your child, either A, doesn’t go to college or goes to college on a scholarship or you don’t need all the money. It’s your money. I like that a lot, plus you get that step up in basis if you never spend the money. So when you think about, and here’s the deal, from an investment strategy or investment theory standpoint, you’ve gotta use the options that are given. It’s a little bit like your earlier comment about going from a big company like the Wall Street Journal to a small company, your investment choices and that 401k really shrunk. You have gotta do whatever the state plan is, and you can only make one change in the portfolio annually. That’s my understanding, I’ve been told that, I haven’t looked it up. Whereas you can invest this however the heck you want. So I don’t like the lack of flexibility in investing. I don’t like, even though it’s flexible, I don’t like the flexibility of what you can spend the money for. I actually had a call, maybe it was a text, on the last broadcast, a person was, he had set it up for nieces and nephews. The money was left. He wanted to give it to some student who could use the money. Wasn’t a family member, could not do it. So there are limitations. I’m not opposed to 529s. I like this other option. I think it gives greater flexibility and it can be done on a tax efficient basis.

Jimmy Maas [00:51:23] Uh, I think by my count, we just have a few minutes left. So let me ask you about some kind of wild cards here that may or may not be on theme, but, um, um. Mentioned them a few times, ETFs, exchange traded funds. You, am I just, am looking, I guess there are probably too many options to, but what are some buzzwords that I should look for, like international, small cap, big cap, that kind of thing that kind makes me feel like, or do I just go with S&P and hope for the best?

Carl Stuart [00:52:04] So, you know Exchange traded funds have been a wonderful innovation. They have two key features compared to a similar mutual fund. Number one, they’re tax efficient and number two, they typically have lower expenses. So the lower the expenses, the more of the investment return you get to keep and they’re called exchange traded because they trade during the day, every day. Whereas a mutual fund, you buy a Vanguard S and P 500 index mutual fund you pay the price for the closing price that day. If you buy it, you get the price of the closing price if you sell it. You can buy the Vanguard index fund during the day. Not that to you and me that makes a difference, but it does to big institutions they can buy and sell during the date. Now, the foundation is to buy something with the broadest exposure. You mentioned the S&P 500, fine. I like what’s called the total stock market. Just has a few hundred more stocks, a little more diversification. That’s domestic. Then you want some international for the first time in years. International is really beating the heck out of domestic. Oh, I wonder what’s going on that’s causing that. Weakening dollar and people getting money out of the United States. Yes, indeed. We won’t go over there. We’ll just say the uncertainty surrounding our policies. And so you want some money over there, I tend to be pretty heavy in that area, like 25%. But most people would say at least 20% international. Again, the passive, broadest international index. Cheap, tax-efficient. That’s the foundation. If you don’t want to go any further, that’s good enough. If you want to do other assets, bonds, commodities, gold, silver, etc., there are ways to do that in tax-sufficient ways as well.

Jimmy Maas [00:53:53] If there is something that is kind of outside the normal, I think of, I could be wrong, but I feel like you are a conservative in your advice. You may not be necessarily in your actual personal portfolio, but is there something that’s kind of kooky, kind of strange that you’ve kind of experimented with as far as an investment goes that you may or may not recommend, but you’ve had good success with yourself?

Carl Stuart [00:54:21] So as you know, I don’t talk about baseball cards, right? Exactly. As you know my policy is not to talk about my own practice and what I do, but I will just say that I invest the same with as our clients do because I just think that’s the right thing to do. But there are strategies out there available in either mutual fund format or available in ETF format that years ago were only available to institutions and I’m going name one it’s called trend following and they engage in trading future contracts on the four global assets, stocks, interest rates, which is bonds, commodities and currencies. They need a sustained trend. And in 2022, when the S&P was down a little less than 20 and the NASDAQ was down over 30 and the bond market was down 13, they were up 15 to 20%. That’s very unique. I am not recommending, I do not make recommendations on Money Talk. But that’s the strategy that I learned about coming out of the global financial crisis 17 years ago. It’s available to everybody, it’s extremely interesting, it’s available both as a mutual fund and an ETF.

Jimmy Maas [00:55:30] So no classic auto auctions or what else? Formula One shares or anything that… No, no, and I’m not gonna… Polo leagues in Dubai, anything like that? No, I think…

Carl Stuart [00:55:44] No, I think that, and I will tell you we’re not talking about Bitcoin today, thank goodness, because I don’t know what the heck to make of that as well.

Jimmy Maas [00:55:53] Um, and, uh, lastly, I look, you’ve been doing this show a long time. Yes, I have been doing money talk for over 30 years. Yeah, that’s right. Um, And you and I have known each other for a long time and it sounds every week. Like you are giving this very conservative, like this is how you grow your income over a long term. And I think probably some people who don’t know you probably think that you live this miserly little life.

Carl Stuart [00:56:21] Ha ha! Oh, be careful now!

Jimmy Maas [00:56:23] Now, I think it’s important for people to understand, Carl lives a very successful life and, uh, he and his wife enjoy, enjoy the fruits of their labor.

Carl Stuart [00:56:35] That’s a fair statement. When I got here and got my license January 79, didn’t know anybody in central Texas and my compensation was zero.

Jimmy Maas [00:56:43] You’ve since created a pretty good life for you, and you raised a family here. Sent the kids to great schools. Yeah, that they paid for, apparently with half of their paycheck every summer.

Carl Stuart [00:56:53] Every summer. Not exactly.

Jimmy Maas [00:56:57] I am happy that you were part of this team and i’m so thrilled to be here you bet thank you

Carl Stuart [00:57:03] and thank all of you for listening to Money Talk. And remember, next Saturday at five o’clock, be sure and tune in to Money talk.

KUT Announcer: Laurie Gallardo [00:57:11] You’ve been listening to a special edition of Money Talk with Carl Stuart. Carl Stuart is an investment advisor representative of Stuart Investment Advisors, and this is KUT and KUT HD1 Austin.

This transcript was transcribed by AI, and lightly edited by a human. Accuracy may vary. This text may be revised in the future.