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Carl Stuart and Jimmy Maas discuss the different the different types and purposes of life insurance, fixed and variable annuities and their investment components, and retirement savings strategies and investment vehicles for catching up on retirement savings.
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 Karl Stewart. 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. Karl Stewart is an investment advisor representative of Stewart Investment Advisors. Now, here’s Karl.
Carl Stuart [00:00:22] Welcome to Money Talk. I’m Carl Stewart and you’re listening to KUT 90.5 and KUT F. Now this is normally when I ask you to call or text and give you the number, but not today. This is a special edition of Money Talk, we’ve done this before my good friend Jimmy Moss and I and my friends will tell me how much they’ve enjoyed it. I am confident you’ll enjoy it as well today. Hi, Jimmy. Hi, I’m glad it’s just your friend.
Jimmy Maas [00:00:51] You talk to about our shows.
Carl Stuart [00:00:52] It’s pretty small.
Jimmy Maas [00:00:53] Group of people very select I thought I would kind of go down a path that we’ve not really dabbled in lately good was death and taxes the last yes well this is yeah well it’s a little it’s death related I find life insurance confusing yeah and there are a lot of things products different things that are out Mm-hmm In the end, life insurance is supposed to theoretically cover costs of your demise, and make sure that your family, depending on what stage of life you’re in, can continue on without your income. It’s not one-to-one income replacement, but in theory, that’s what it’s supposed to be. Am I wrong on that? So, I think…
Carl Stuart [00:01:50] The best way to approach this is let’s first talk about the reasons to have life insurance around death. That’s one set. And then there’s a whole other set that I frequently get questions on Money Talk, which is the investment part strategy of life insurance.
Jimmy Maas [00:02:12] And that’s where I was going to go after I kind of got an idea of, like, what the purpose – the vehicle of life insurance was initially intended to pay a death benefit. Be a net for those who are left behind. Survivors, that’s correct. Not necessarily an inheritance for those left behind –
Carl Stuart [00:02:33] Right. So here’s the deal. I learned this a long time ago from a highly respected life insurance professional. He explained to me that there are three reasons to have life insurance, and each reason determines the type of life insurance you purchase. The first one is for estate protection. So what happens is if you are a wealthy person and you die and your assets exceed a certain level, the federal estate tax quickly gets to 40%. Now, I’m old enough to remember that that number was $600,000. And that changed dramatically during the George W. Bush administration because people, their homes were worth that amount. Or they had a small business, but they didn’t have the cash to pay the tax, et cetera. And so they started creating. What’s called a lifetime exemption, and it has a, if you will, inflation adjustment so that it goes up every year. So right now, every person, every listener, has a $15 million lifetime exemption. So if you are a single person when you die and all of your assets minus all your liabilities. Are less than 15 million dollars. You have no estate tax liability. If you’re married and you have a proper estate plan, that’s 30 million dollars, okay. So if you’re one of those rare individuals where there’s gonna be a big estate tax, you buy life insurance to pay the estate tax. It’s very technical. It’s called a irrevocable life insurance trust. And since that’s a permanent need, you buy permitted insurance called whole life, full stop. That affects very few people. The next one is more common. Let’s suppose you and I started many years ago and now have a successful dry cleaning business where we have- Mole cleaners in town. Absolutely. And we have multiple locations and it’s your biggest asset and it is my largest asset.
Jimmy Maas [00:04:57] And actually this is public radio. I should say very good dry cleaner in town. Oh, come on close exactly can’t make any claims
Carl Stuart [00:05:04] That’s right. Now, so we get the business independently appraised, and you own half of it. So I buy life insurance on your life. You predecease me. The life insurance benefit shows up. By the way, life insurance death benefit is not subject to income tax. So you die, the life insurance shows up because I’m the owner of the policy. You are the Assured. And I am the beneficiary, I take that money, I pay your heirs, and now I own the business 100%. So that’s a permanent need, and so you buy whole life. Now we come to the last and most common reason. So I’ll just use a personal example. Many years ago, we had three children at home. We had not saved the money we needed to have college education for all three. My wife was extremely busy raising three children and i was the sole source of income and we had a mortgage and If I had died, she’d have a real problem. And so we needed life insurance. But today they’re adults, they’re out of college, they’re on their own, I don’t have a mortgage, and we’ve saved and invested for our future. So that need went away. So that was a temporary need. Now temporary might be 20 years, but it was nevertheless a temporary needs. And when you have a temporary need for a death benefit, you buy temporary insurance, which is called term insurance. It’s much less expensive in the long run than whole life. And it’s a great deal if you buy this, let’s say when you’re 40. And it goes away when you’re 60, it’s fine. But if you don’t get to be where I was at 60 and you still have the death benefit, it gone. Now you try to go buy life insurance at age 60, it’s really expensive. So the three needs are estate preservation, business continuation, and income protection. So when you buy life-insurance, you have to understand. What is the purpose of this death benefit? And that’s how you determine what type of life insurance to buy. Now, pricing life insurance. Yeah, that’s the other thing. Okay, so it turns out, not surprisingly, that life insurance companies have all kinds of data, mortality data. They hire people who are called actuaries, and they predict how many people are gonna die this year. They predict it by gender, just not by name. So they price the premium so that the death benefit will be there, but also so that they make a profit and stay in business. Because the whole concept of life expectancy is a certain number of people die before that date and a certain of people died after that date. That’s why if you’re a smoker, your life insurance premium is higher because that’s a contributor to a shortened life. Meaning the death benefits gotta show up sooner. So, whole life insurance and term insurance are very efficiently priced. I mean, if you wanted to waste some time and go get quotes on five different policies for the same death benefit and the same type of insurance, the premiums are gonna be virtually the same. So that’s the death benefit component. Now, there’s a whole nother part of the insurance industry. That has an investment component. And generally, it’s set up this way. When you buy life insurance, you’re putting money in if it’s whole life. If you have term, it is gonna go away. There is no growth in value. When you pay a premium, some of it goes for the commission to the agent, some of goes to the insurance company. And some of it goes to something called cash value. And many times in the very early years, there really is no cash value because of those other expenses. But if the cash value grows and you leave it alone, you pay no taxes on it during that period, and you can access it and take the cash value down to a certain level out of the policy. If you’re over 59 and a half, it’s income. If you are under 59 and half, it’s an income plus a 10% penalty. All the money that comes out is first attributed to any of the growth and then the rest of it comes out, it’s your own after-tax money. Now, this is the, if you will, explosion in what we think of as the annuity business. Now, the word annuity.
Jimmy Maas [00:10:21] So just hold on before we go past that Past 59 and a half you can take the money out at the cash value of your policy The amount that is a whole life policy that is correct or better whole life premium. Yeah, it’s a whole Whistles a whole-life policy. Mm-hmm. You can take that out and then whatever is above The the cat I’m sorry it’s a but it’s tax free to a certain point.
Carl Stuart [00:10:55] Yeah, what happens is, let’s suppose you bought a policy 20 years ago, and let’s suppose that you’ve paid in $20,000 of premiums, and today the cash value is $25,000. The first $5,000 you take out of that policy is attributable to the growth and is subject to taxation. Everything after that is you getting back your own money. Which you put in, which was after tax money, and that’s not subject to tax because you’re just getting your money back. Now, annuities. This is…
Jimmy Maas [00:11:37] Very confusing. And this is why I bring this whole thing. This is why, I wanted to kind of wallow in this a little bit and figure out, like unpack it completely because it gets, I mean it, and someone will sit across from you at a desk and they will tell you things and they’ll show you things on the screen and you’re like, this seems like it should make sense, But it’s just Help me. Help me, Carl. Help. Yes, and.
Carl Stuart [00:12:10] The other thing is, you have to be careful because life insurance, particularly in my experience, my experience is that the investment types are sold based on their benefits. Not necessarily does the person understand the downside or the liabilities. So. There are a few different kinds of annuities. But first I want to say that the types of annuities we’re talking about are different from, I encounter for example, people who have spent their lifetime teaching in the public school system. And they’re participants in the teacher’s retirement system. And when they retire, they get a monthly income for life. A lot of times they call it an annuity. Because it’s an annual amount, hence the word annuity. That’s not what we’re talking about. We’re talking you taking your dollars and putting it in this quote investment product. So there are two major distinctions. One’s called a fixed annuity and the other’s called the variable annuity, when you put money in a fixed innuity, in some ways it’s the easiest to understand. Because the insurance company says, Jimmy, you give us your $10,000 and we’re going to pay you 5% interest. And as long as you leave it there, you’re not going to pay tax on it. And of course, you are subject to that 59 and a half year rule. And at some point, if you want the money, you can have the money back, the value of cash value plus the growth. You pay your taxes on the growth, you go on down the road. The problem, or at least the challenge, is if you go to your bank or credit union or savings and loan or someplace and someone talks to you about this, you need to understand it’s not a certificate of deposit, it’s guaranteed by the insurance company, not FDIC and it has a surrender charge because the person from whom you purchase this is getting paid a sales charge or a commission. The annuity company wants to make money, they pay the person at the credit union, and they pay you. So they have to give you a disincentive to take the money out before the term. Let’s say the term is five years. So that’s the surrender charge you have to be aware of. They’re fairly straightforward and relatively short in duration. But what the growth is, is many years ago when the stock market bottomed in 1982 and began a long rise that peaked in March of 2000 with some down years, but still it was a great period, insurance companies said we need to have a competitive product because our fixed annuity is not. Doing it. So they said, here’s what we’ll do, you give us your money, we won’t guarantee you a return, but we’ll have a range of what look like mutual funds. They are mutual funds, they’re called separate accounts or variable accounts, and you can pick these mutual funds or we’ll pick them for you and the money is going to grow because it’s invested in the stock market or it’s invested in the stock market and the bond market. And it’s gonna grow and if you leave it alone, you won’t pay any taxes on it. And if you take it out, you’re subject to the 59 and a half year rule. And when you take out, all the money that comes out first is attributable to the growth in value and then the balance is attribatable to your own after tax purchase. Unless you choose to do this annuity inside your IRA, which you can. Probably usually not particularly attractive idea but you can During years where the stock market’s done particularly well, the sales of these really go well because people say, wow, I can get stock market-like returns, pay no taxes on them, and at some future point I can take the money out to supplement my retirement expenses or I can leave it for my spouse or my kids. Fine. That’s a variable annuity because the rate of return varies. The stock market has a great year, it goes up. The stock has a stinky year, it goes down. It’s variable. Now, you got to raise your finger. I do. You were gonna make a second point. Can we do it after the break? Of course, you’ve been listening to Money Talk and you better keep listening to Jimmy and Carl because we’ll be right back.
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KUT Announcer: Laurie Gallardo [00:18:07] Welcome back to a special edition of Money Talk with Karl Stewart. Just a reminder, he is not live this week, so he is NOT taking calls for this show. Now, back to Karl, joined by KUT’s Jimmy Maas.
Carl Stuart [00:18:24] Welcome back. You’re listening to Money Talk on KUT 90.5 and the KUT app. We’re enjoying a special session today. My friend Jimmy Moss and I are here together and Jimmy is asking me questions. He started off by talking about life insurance and then we talked about annuities. And I was about to make a point that I’ve observed about variable annuaries. And that is this. If you need lots of security to invest in the stock market, it’s a frightening thing for you to do, but you know it’s the right thing to do. A lot of variable annuities will add a feature which says, Jimmy, you put your $10,000 in here. We think, based on history, no guarantees, you keep this long enough. We think it’ll be worth $20,000. But in the meantime, should you have an accident and die, at the same time that your 10,000 is only worth 7,000, we’ll guarantee your beneficiary gets 10,00. It’s called a guaranteed death benefit. Sometimes people have to have that, I’ve observed, to take the, quote, risk of the stock market. Other than that. If you assume that you’re gonna buy the same mutual fund on your own, or you’re going to buy the mutual fund inside the variable annuity, the rate of return over time has to be less inside the valuable annuity because you’re paying the expenses of the mutual funds and the expenses of the annuity. You’re paying for that guaranteed death benefit. You’re paying the person who sold it to you. So there is a drag on performance. And so when someone considers an annuity, they should clearly understand what the costs are. Now, one of the things that drives me crazy is people will say to me, this nice person said there’s no commission or sales charge, to which I always say, you think they did this for free because you’re a fine person, they did not. You do not see a sales charge or commission reduced from your purchase, but the insurance company paid that person and they deserve to get paid, and then the insurance companies puts in a surrender charge, something I mentioned earlier, to give you an incentive to not take the money out. Yeah, let it ride. Exactly. So if you talk the same, let’s just say, because it’s a big company, the same Fidelity Mutual Fund. And you bought it on your own in the Jimmy account, or you bought inside a variable annuity, at the end of the period, whatever it is, the one inside the variable annuities is gonna be worth less because you have these other expenses deducted from it. That’s not bad. It just means you need to be aware of this when you make that purchase. Now the last thing I wanna say.
Speaker 5 [00:21:41] Cough.
Carl Stuart [00:21:47] Three, two, one. The last thing I wanna say is there are some annuities out there that promise, and I think that’s the proper term, that if the stock market goes down, you will not lose money. And if the market goes up, you will make money. And someone might scratch her head and say, really, that sounds too good to be true. And what these are, they’re called indexed annuities, and they’re very complicated. I won’t even get into what they do, but what they’re doing is buying financial instruments that will, if the market declines, will make up for the decline. But if the markets has a really good year, you only get a portion of it. Now the challenge with these, beside them being expensive and hard to understand, is that the stock market may deliver a 7-8% return over time, it rarely delivers a 7 or 8% per year. So the last four years would be a good example. 2022, Standard& Poor 500, a commonly considered benchmark of the U.S. Stock market, was down 19%. Then in 2023, 24, 25, And as we have this broadcast, 2026, the returns have all been double digit returns. If you were in one of these index products, you would not have gotten all of those returns because it would have been capped. These are my least favorite of the annuities and I’m hard pressed to figure out a person purchasing one unless the idea of a smooth ride while getting some of the stock market is really appealing, and then I would suppose that makes sense for them.
Jimmy Maas [00:23:49] And this is kind of where I’m sitting on. You have these investment vehicles, um, that are also, they also, they serve a dual purpose. There is a death benefit, which is not going to help you, but it will help somebody else around yours. And, um. So is it worth it versus going out and just getting in just a mutual fund somewhere or an ETF type thing?
Carl Stuart [00:24:26] So I’ve been doing this 48 years, and as I like to say on Money Talk, what I’m going to say is what an elected official says when he discovers that being in favor of data centers is not nearly as popular as it was six months ago. He says, Jimmy, my thinking has evolved. Okay. And it has evolved.
Jimmy Maas [00:24:48] And I’m sure it has, because at some point, that safe money seems like a great idea, and at other times, put it all in, in the market, and go go go is a good idea.
Carl Stuart [00:24:58] And I’ve been around long enough to know that you’re better off investing the money outside of the life insurance product and just own life insurance for those first three reasons that I articulated. Separate your investments from your life insurance. They serve two different purposes.
Jimmy Maas [00:25:21] There are instances where your term is limited. Like, that’s gonna be the end of your ability to buy term. That’s right. And should you then examine what whole life options are or run for the hills?
Carl Stuart [00:25:41] Well, I mean, you can’t wait till the end of the term because you’re older and whole life insurance is based on your expectancy and the older you are, the more expensive it is. So that’s why you go back to the beginning and say, am I doing this until the kids are grown and gone? We’ve paid some or all of their education or none, that’s a personal decision. And, am I leaving anybody? Will I be leaving anybody in such a horrible financial situation that this lump sum really going to matter to them? That would argue that that’s a permanent need but and I’d like to say in the well-planned financial life, we all start, we get a job, what do we do? We generate more liabilities than assets. I mean, right, we gotta buy a car, we gotta pay the rent, maybe we’re saving for a mortgage, and then maybe we fall in love and get married. Yeah, right.
Jimmy Maas [00:26:50] We’re all going to Cabo.
Carl Stuart [00:26:51] We’re taking the dry cleaner conference to Cabo, it’s going to be amazing. I love those conferences, those dry cleaning conferences are just, they’re so much fun. So yeah, I mean, I know it’s hard to think ahead that far ahead, but that’s just, that’s my thinking has evolved, that other than the need for the death benefit, I like investing the money on your own outside of it.
Jimmy Maas [00:27:16] Um, I guess my last question about related to this, um, You see the ads, right, for you can get a million dollars of insurance for something incredible. $1.98 a month. $15 a month, you know. What’s the trick there that allows them to sell it for such a low price, or is that just to come on to get you to?
Carl Stuart [00:27:44] Yeah, I think it’s a come on to get you to call. I think that they’re pricing I think their premium actually exists, but you probably have to be a very healthy 15 year old not smoke
Speaker 5 [00:27:53] Man
Carl Stuart [00:27:55] I was once. Yeah. He didn’t start smoking until you were 16, so you should have gotten the insurance back then. My parents should have bought insurance. They should have.
Jimmy Maas [00:28:01] I should have bought a whole when I was 15. Guys, what were you thinking? All right, well, that’s enough about that. I’ve often wondered how these things go, and you see so many competing ideas. But I do see a benefit to having a benefit, and sort of a safe place to park your money, if that makes any sense. It’s not quite a bond, it’s not a quite.
Carl Stuart [00:28:26] It’s not quite a bond, it’s not a good place to park your money. Because it’s either A, you can’t get it, or you get it and it’s expensive because of the surrender charge, or not enough there to support the death benefit, you cant take any money out.
Jimmy Maas [00:28:44] All right, so let’s move on to, as I scroll down to, where are you? Okay. I’m not, I don’t think I’m old, but I’m older.
Carl Stuart [00:28:58] Mmm, but you look so young
Jimmy Maas [00:29:00] Ah, so-
Carl Stuart [00:29:02] It’s too bad this isn’t television and PIP could sound remarkably handsome and fit your…
Jimmy Maas [00:29:06] You know, the dry cleaning liquid’s really good, as an eye cream keeps the… You don’t need the Botox. So… Maybe I haven’t, maybe I have not saved as much as I should. We’ve discussed before, basically you want a 4% draw and you want that 4% draw of your savings to be close to ballpark around the neighborhood of your current or future needs.
Carl Stuart [00:29:42] The kind of quick and dirty is, you say to yourself in today’s dollars, if I weren’t working, how much income would I need to meet my expenses and to live the life I’d like? The one you’re-
Jimmy Maas [00:29:58] living, essentially. I mean, you don’t, if you don t like your life right now, and you think it’s somehow going to improve dramatically in retirement, on income, because of increased income, that’s not gonna happen.
Carl Stuart [00:30:12] So, some people, and go back to something I said earlier, if you are a public school teacher, or you are state employee, or a member of the military, I use those intentionally, all three of those enterprises have what are called pensions, defined benefit plans, where you have to put money in, you don’t get a choice, withdrawn from your check, your employer has to put in money in it, they don’t’ get a choose. And when you qualify, which is a combination of years of service and your age, you get lifetime income. So when you’re thinking about how much do you need invested, the first thing you do is you say, do I have any lifetime income? For most people, the answer is no, because it used to be in the old days, the big comp, the IBMs and the Coca-Cola’s and the Procter& Gamble and GM. Provided that those are gone. They’ve been gone a really long time. Okay, the second is Social Security. Well, this has really become appropriately controversial Right now the actuaries in the federal government say the trust fund Will not be sufficient to pay the benefits in about four to six years from now So if you’re listening to money talk today and you’re 40 years old, you’re beginning to say, how much confidence can I put in what that benefit’s going to be? That’s a personal decision, but it’s not a big number. Okay, that leaves this hole, if you will. Yeah, there’s a gap. How am I gonna plug this hole with income? And the only way you’re gonna do that is to save and invest it.
Jimmy Maas [00:32:04] Now to the beginning of my premise. Mm-hmm. If I am advanced, maybe I’m within 20 years of retirement or even sooner What what’s my best vehicle for catching up yeah per se like how do I yeah
Carl Stuart [00:32:22] Well, first of all, if you are working for somebody else and they have an employer-sponsored retirement plan, your contributions to that can be tax deductible. So instead of paying the 20 or 22% tax, I’m just making that up, that money goes in for your retirement. Many times your employer will make what’s called a matching contribution. That’s free money and you don’t pay any income tax when it grows, and when you leave that employer, you can do something called an IRA rollover, which means you can take the money and put it in your own Jimmy IRA and pay no taxes on that transaction and continue to have it grow. So the first question you ask yourself is, do I have an employer-sponsored plan? Then, the second is, do I qualify to make money? Do I qualify to put money in something called a Roth IRA? Because there’s an income test. If you make above a certain amount of money, you can’t do a Roth IRH. It’s a stupid dumb law, but it nevertheless exists. But you can always do an IRA. You just won’t get the tax deduction if you make a lot of money. So you can work for a company. They have a 401k plan. You participate you make too much money to make it to do a Roth you make too much to get a tax deduction for your IRA if you choose you can do an after-tax IRA understand that these are illiquid investments or retirement investments because there’s a penalty if you take the money out before your fifty nine and a half then I haven’t gotten to answer your question I’m talking about the vehicles these are just places where Right, so What I’ve come to like even more, are investing on your own in an individual. If you’re a single person, individual, if you’re married, a joint account, where you maintain maximum flexibility, if you wanna access some of the money before you’re 59 and a half, there’s no tax penalty. Likely, it’s gonna come out at a favorable tax rate because that’s called the capital gains rate and it’s only paid on the bet on the growth and the money grows. And today, either on your own or with your advisor, you can own, as you used the term a while ago, exchange-traded funds that are very tax-efficient, they don’t throw off a lot of tax liability, and you allow the money to compound. So it’s employer-sponsored plan, IRA or Roth IRA, investing on your home. I really like the investing on you home, because life’s uncertain. And you might say this is for my retirement and it turns out you have an emergency and you can access that money by simply selling shares of the exchange traded fund paying possibly a long-term capital gains rate only on the growth in value but what do you do with the money here’s something that I have Bitcoin. That’s all of it. You know, you took the words from my mouth. That’s it, folks. Thanks for listening to Money Talk. I see no reason to continue to listen to NPR with advice like that. I go to the convenience store, I go the machine in the back, and I make an investment. Yeah, there you have it. So. Investments go together with time. How much time do I have between making this investment and when I want some or all of the money back? Right.
Jimmy Maas [00:36:24] And that’s the important thing because you don’t want all of it. I mean, I think in our minds, we’re like, Oh, when I turn X years old, I will need all of that sort of sitting, sitting in a pile of bullion in front of me. Yeah. Big mistake.
Carl Stuart [00:36:39] You want it so you can take a little bit out
Jimmy Maas [00:36:42] So you don’t necessarily need No, you don’t now may not grow like it it will during that time But you don’t need it to like stop growing essentially. So two or three things I think
Carl Stuart [00:36:57] How I think about it is money, there’s three buckets. There’s money in my checking account to buy groceries. Pay the rent, pay the mortgage. I don’t expect that to somehow grow in value. I just want it to be safe and know I can get it. That’s cash. The second bucket may be for some people, I’m saving for a new car or I’m saving for vacation, all right. I know I’m gonna have to replace. Some appliances in my kitchen. That money is going to go away somewhere between 12 and 36 months from now. That’s not your financial future. Then we come to the most important, financial independence. And listeners know, I always define this, is you want there to be a time in your life when you get up in the morning whatever it is you do that day. You do because you want to and not because you have to. And so That’s money with a longer time horizon. Yes. When was that day for you?
Jimmy Maas [00:38:00] I’m not going to say when, when did, how long ago did this occur? It was a while back. Do you remember how you felt that day? Actually, I do. And this is why you recommend it for everyone. Yes, I do.
Carl Stuart [00:38:16] I just, this is a personal story. Yeah. So when, okay, here we go. In 1978, I started back then. We recall stock brokers. We had two kids, age four and one. And to show my good judgment, we had a third child two years later. My wife was, my wife was on the future. Right. My wife is on trying to corral a little rugrats and I had zero guaranteed income. And I didn’t know anybody in central Texas. Okay, here we are today. So I would tell you that for the first 15 years of my career, I felt like every morning I got up and I heard the cries of my hungry children and I grabbed the club and left the cave and went out and hunted the beast and I brought the beast back and my wife cooked it and the kids got fed and everything’s fine. The next morning, guess what? Here comes the beat, here comes the cries. At about 15, I remember thinking, you know, this is going to be okay, it’s going to be okay. So that’s where you want to be. You cannot get there from here by leaving the money in the bank, because if there’s one fact, it is cash, CDs, over time, after the rate of return, after inflation and after taxes is a negative number. If you can make 3.6% in a government money market fund as of today’s broadcast, and inflation’s 3.4%, and oh, by the way, you pay taxes on that, you do not have to be a math witch to know that you are losing money on an after-inflation and tax basis. There are only two things you can do, and for most people, there’s really only one. For some people, buying, income, producing real estate. I get these questions on Money Talk all the time, And I say, look… The reason income producing real estate works is first, you have to live in a community that’s growing. I point out in my hometown when I graduated from high school, there were 16,000 people. Now there are 9,000. There is no real estate investment in my home town that is going to make money when that collapse is occurring. In central Texas, we are fortunate to have the economic winds at our back. And so if rents go up over time, so will the value of the property. And that’s why investment real estate, income producing real estate has a history of inflation beating returns. But there can be years, we’re in one right now, where prices are worth less than they were a year ago. And people have come to me on Money Talk and say, I wanted to sell this, I can’t find a buyer or I can get out from underneath my mortgage. So it’s a long cycle investment. The second one is the stock market. And the stock market is not a gamble. It is a thoughtful participation in human innovation. A thoughtful participation and human innovation, the iPhone didn’t exist until 2007. I’m old enough to remember when I started doing radio work and we were together when I starting doing radio at another station here in town. My job was to come on the air at 7 37 a.m. Drive time and say the dow jones industrial average was down three points yesterday why nobody knew there was no internet there wasn’t even financial shows on tv and to have one of those tickers at home exactly that you read like gomez adams i’m old There you are, there’s a cultural touch point. Here’s what’s wrong with the stock market. What’s wrong the real estate market is it takes forever because it could go down for five years before it goes up. The stock market is so available. It’s what we call daily liquidity. So if the teacher’s retirement system decides on Monday they want to sell $100 million worth of stock, they push a button and the next day $100 million is in their account. You can’t do that with real estate. That’s what real estate has, what’s called a liquidity premium, which means you should make more money because you can’t get your hands on it. The stock market, you can make your decisions immediately. That’s both an asset and a dangerous liability because you say, uh-oh, war in Ukraine, I’m out. Uh-oh a war in Iran, uh oh, I am out. Uh-Oh, COVID, I’ m out. Uh- Oh, artificial intelligence, I m out you can make quick decisions. Which in my 48 years have been wrong. Time for us to take a break. We’re having a lot of fun this afternoon, Jimmy and I. It’s also a lot fun for you to listen, as it always is, stick around, we’ll be back.
Jimmy Maas [00:43:25] Money Talk airs every Saturday at 5 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 non-profit 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 [00:44:00] Welcome back to a special edition of Money Talk with Karl Stewart. Just a reminder, he is not live this week, so he is NOT taking calls for this show. Now back to Karl, joined by KUT’s Jimmy Maas.
Carl Stuart [00:44:16] Welcome back. You’re listening to Money Talk on KUT 90.5 and the KUT app. We’re having lots of fun today, special edition of Money Talk. My friend Jimmy Loss and I are here together. I’m doing my best to answer his thoughtful, provocative.
Jimmy Maas [00:44:33] Questions. I did want to back to what we were talking about about trying to catch up.
Speaker 5 [00:44:38] Mm-hmm
Jimmy Maas [00:44:39] target dates for investments. There’s some vehicles that just say, you know, they actually put the year on there. 2030, 2040, 2050. When people come to see you, do you also establish these target dates and like?
Carl Stuart [00:44:56] So target date funds came about because in 401k plans, people were looking and the plan sponsored the employer so I gotta have a lot of options. And they look at this list of 15 different funds and they don’t know what the heck to do and so they don’t do anything.
Jimmy Maas [00:45:12] They’re paralyzed by making that decision you were just talking about about the cost.
Carl Stuart [00:45:17] Slip. And back when Enron went out of business, there were stories in the press about how people had all their money in Enron stock and it went to zero and wiped out their retirement savings. So long-come target date funds, and your plan can have one from Vanguard or Fidelity or JPMorgan or American funds, doesn’t matter who it is, what matters, but not for the purpose of this conversation. You pick a date and then they will manage the assets in that. To be there in 2025, or 2030, or 35, between generally stocks and bonds and cash. Now, is it better than sitting in cash and doing nothing? The answer is yes, it’s far better than that. Is it the best thing to do? In my opinion, it is a little more complicated because does this plan for, let’s say you’re gonna retire in 2040, okay, 14 years from now. Is this plan gonna have all your money sitting in nice safe investment when you retire? But wait a minute, you may have another 25 years to live that you may not have enough, you need it to grow. Or is it gonna continue to have exposure to the stock market because you have a longer life expectancy? You’re gonna be around the long past. Yes, absolutely. You know, let’s knock on something, 2040. So one of the ways you can do this, if you wanna, quote, game it, is you can say, yes, I’m gonna retire in 14 years, but I’m not gonna buy the 2040 fund. I’m going to buy the 2055 fund so that they’ll keep more money in the stock market because they don’t know that I’m gonna retire in 2040. So do I like them? I like em better than sitting in cash. I like him better than just buying the company stock because of the risk I articulated. Is it better than picking the portfolio that matches your goals and objectives? No, but they’re very popular and I’m not arguing against them. We have a lot of listeners to Money Talk. Some of them don’t want anything to do with the decisions and they just put it in there and forget it. So when you look at it from that point of view, I think there have been a wonderful innovation for investors to do on their own or in their retirement plan.
Jimmy Maas [00:47:28] You, um. There is a benefit, though, to projecting farther than you. Yes. Your retirement day. Yeah, your retirement day, yes. You want that growth to continue. You sure do. I mean, you just mentioned, A, 2040 is way closer than I would like. And also, 2055, I’ll be my. Uh, you know, um, I would be my father’s age currently, and he still has some years to go. So who knows, you knows, who knows what’s, what’s going on.
Carl Stuart [00:48:04] Yeah, and as I’m fond of saying the three things you have to know how long am I gonna live? What’s gonna happen to cost of living and what’s the return on my savings and investments and of course the answer is we don’t know any We don’t get the answer to any of those so you have two error on the conservative side and say yeah My dad died at 77, but I got a plan of living to 95 so I don’t want to be 83 and know that next year I’m gonna run out of money, right? That’s the worst possible thing that can happen. Yeah last trip to Cabo
Speaker 5 [00:48:35] Try it, it was-
Carl Stuart [00:48:36] cleaners.
Jimmy Maas [00:48:39] Um, you, you have a, we have a limited amount of time, um, because I don’t want to start into a big new discussion point, but if we, if we just are diligent, we put the money in month to month, month to mouth, just the boring work of it all. Yes. Just do we get close and our is, do we get close enough to make it worthwhile?
Speaker 5 [00:49:08] I guess.
Carl Stuart [00:49:08] The answer is the earlier you start, the less you have to put in, the later you start the more you have put in because it has less time to grow. The magic of compounding is the longer you’re in the bigger that final number is. But most of us don’t start when we’re 25 because we can’t imagine ever being 65. So we wait and then we have kids and then that comes along and then wake up at 43 years of age and go, holy moly, I need to start saving for retirement. And then I’ve got a set of expenses set up, and I go to my advisor and she says, you need to save 15% of your compensation if you hope to get enough money to live on 4% of that. When you’re retiring, you go, can’t happen, not gonna happen. Then what you have to do is you have to find ways to reduce expenses, and you have be absolutely, as you said, diligent about putting it in every month, no matter what the headlines are. Do the best you can. And don’t retire when you’re sick.
Jimmy Maas [00:50:07] If you don’t have the money right all those years ago making fun of Christine for not going out with us and doing all the fun Things exactly she was putting away money, and now she’s shaking her head at us. Yes, right. She’s in Cabo
Carl Stuart [00:50:18] and she’s not even a dry cleaner.
Jimmy Maas [00:50:23] Well, I appreciate you entertaining all my questions.
Carl Stuart [00:50:26] Well, I’ve had a lot of fun as well. And thank you for listening and tune in next Saturday for Money Talk.
KUT Announcer: Laurie Gallardo [00:50:35] You’ve been listening to a special edition of Money Talk with Karl Stewart. Karl Stewart is an investment advisor representative of Stewart 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.
