In Ep. 258 of the Mullooly Asset Podcast, Brendan and Tim talk about a few interesting articles from the last few days. They discuss why Social Security should not be considered the bond portion of your portfolio, a “hidden” cost of 401(k)s, unnecessary monthly subscriptions and more!
‘Stop Wasting Money on Unnecessary Monthly Subscriptions’ – The Wall Street Journal
‘Millennials Need to Get Off the Sidelines and Start Investing Now’ – CNBC
‘The Hidden Cost of Your 401(k)’ – CNBC
‘Social Security: It Is an Asset, But Not a Bond’ – Mike Piper – Oblivious Investor
Social Security is Not a Bond – Transcript
Tim Mullooly: Welcome back to the Mullooly Asset Management podcast. This is episode number 258. This is Tim Mullooly and Brendan is here with me today.
Brendan: Yeah, I think we want to lead off … We have a number of good articles today to discuss different topics, but the first one I want to talk about is from the Wall Street Journal recently. And they were talking about how all of us, us included, should stop wasting money on unnecessary monthly subscriptions.
Tim Mullooly: Yeah. In today’s day and age, there seems to be a subscription for everything not just Netflix and different technology, but-
Brendan: That’s how it started. That’s how they roped us all in.
Tim Mullooly: Yeah. Now music and …
Brendan: I pay for Netflix. It’s $10 a month. Oh, it’s just like Netflix for this new thing.
Tim Mullooly: For Razorblades.
Brendan: All different stuff.
Tim Mullooly: For everything now.
Brendan: So, the word unnecessary, which was in the headline, is interesting because that means something different to everybody. But the whole point behind the article was just that these subscriptions are a little bit … they’re a little more difficult to track or to remember than other expenses that you might pay out of pocket, whether it be cash or you actually have to enter credit card information to do it on a month-to-month basis or however often you’re doing the thing.
So, when you set these subscriptions and then you forget them, I think that unnecessary means to you that maybe it’s been sitting there and you haven’t been taking full advantage of it or you’re not getting your money’s worth anymore.
Tim Mullooly: The technology has been great in making it easier to get services and pay for things, but it also is a double edged sword, like you’re saying, in the sense that you’re not manually paying for these things every month. So, you just, like you said, set it and forget it. Unless you’re ripping open your bank statements every month or going online and checking your bank statements to see where the money’s going, you can forget about it and end up paying for services that you’re not even using anymore.
I think in the article she said, “84% of Americans underestimate the money spent each month on subscriptions.” A lot of these services get pitched, like you said, as it’s just like Netflix. For just a couple bucks a month, you can have this service or whatever. But over the years, over the months they add up and a couple of years go by, you realize you’ve spent hundreds of dollars on a service that you haven’t used in six to 10 months or whatever the time frame is.
Brendan: Yeah. They also said that the average American spends $237 a month on subscriptions, and that’s just an average. So, you’re thinking that’s middle of the back. That’s the median there. So, there are people who spend far more than that. There are some who spend less than that, but really the best way to do or to get get this under control is to basically do an audit on yourself.
They named some apps in this article that can do it for you. I’m old school. I would rather just go onto, like you said, a bank account online and just print out the statements and literally just write down. Pull up a month’s worth of history or maybe a couple so you make sure you get all of them. Just write down all of them and the costs that is being incurred by continuing with them. And then, you have the list in front of you and you can decide, “Okay, I think this is necessary, that is necessary, but this maybe is unnecessary” and that’s maybe how you can weed out some of the things where you’re not getting your money’s worth or not even using it or you didn’t even know that you are paying for it because one of the things they brought up in here was that some of these subscriptions, you sign up and it’s part of a free trial. And then it just converts to being the ongoing costs at a certain point. And people just aren’t paying full attention.
And it’s not a huge number that’s coming off of the bank account statement each month. It might be nine or $10 or something. So, you just gloss right over it. So, I think audit is the way to go.
Tim Mullooly: Yeah. And it’s not that we’re saying, and the article wasn’t really saying this either, that subscriptions are bad. It’s just you need to keep track of these things. So, you can go through, audit yourself and go through your bank statements like we’re saying and list out all these subscriptions and see that you’re paying a couple hundred bucks a month in subscriptions. But if you find that you’re using all of them and they make your life better and you think that they’re justified expenses, then that’s fine.
Brendan: I think the exercise is important, though, so that you can at least make that decision on a wholesale basis. Or maybe you find out that there’s overlap or things like if you’re a family, they were saying, and you’re all paying for these things separately. A lot of them offer family plans where you can just consolidate and get a discounted rate to have everybody under a family plan or something like that with Amazon Prime or Apple Music or Spotify.
We could rattle off a dozen of these things now that people are using Netflix, Hulu, HBO. They’re all there, and if you let it get away from you, it could get out of control.
Tim Mullooly: Audit Yourself. I think the author said that she put a date in her calendar like her yearly audit, an audit day or something.
Brendan: It’s not something you need to look at every month or anything, but I think once a year it’s probably good to review and just be like, “Have I used this at all in the last 12 months?” And just be honest and decide if you want to keep doing it or not. And don’t just keep it there because it’s there and it’s on autopilot.
DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
Tim Mullooly: There was a headline, and the headline kind of jumped out at me. The article itself was actually not as click baity as as the headline was. But it was “millennials need to get off the sidelines and start investing now.” This was an article on CNBC. I took slight offense to it because it has that tone of “you dumb millennials, what are you wasting your time for? Get off the sidelines and start investing. You’re making a mistake if you’re not.”
But then, you dug deeper into the articles and like we’ve said in previous podcasts, the author most likely didn’t write the headline. Everything that the author laid out in the article I thought was useful information.
Brendan: Yeah, I think that the headline triggered both you and I, because we see people come in who are our age and who have been told something like this in some form or another that they have been messing up and to begin investing right away.
While I agree because one of the biggest advantages any investor has is time, and more time is better, meaning you can afford to let your investments ride and compound for many years. That’s terrific. So, you want it to take advantage of more time. So, start investing younger, but we also see people who have begun an investment plan without doing some of the basics first, which should always preclude putting money, especially into something like a retirement account where it maybe becomes less accessible for a long time if somebody is in their twenties. There’s a penalty to get money out of most retirement accounts before age 59 and a half. That’s a multi-decade lockup period or penalty period or penalty period there. People will start shoveling money into retirement accounts well before they’re ready to, in our opinion.
Tim Mullooly: For people our age, for these millennials that they’re talking to, there are a lot of big purchases still to be made in people’s lives and buying a house. If you’re starting a family, having kids, stuff like that, you don’t want to be tying your money up into these retirement accounts or just putting it into the market and not giving it enough time. No one knows what the market is going to do over the next one to two, three, four years, five years.
So, if you don’t have a long enough time horizon, you don’t want to be putting that money at risk if it’s going to be for something like a down payment on a house or childcare or something like that.
Brendan: Yeah, I think the thing that happens, though, is that people tend to think of this in binary terms. So, it’s either you put the money away for the long term or you don’t because you’re not ready. And the way that I like to think about it and approach it is that you need to identify what the goals are over the short term, intermediate term, long term.
So, maybe in the next couple of years you’d like to pay down student loan debt. Between the next five and 10 years, you’d like to purchase your first home and start a family. And then after that, you just have your longterm goal of retirement. Okay. We can serve all of those masters, so to speak. Now with your money, by getting on top of your cash flows and just funneling the appropriate amounts to these different causes … It doesn’t have to be “we do this thing first with all of the money that we can afford to save and then we move on to this thing next with all the money we can afford to save.” You can just tinker with the amounts that you’re sending towards these different goals over time to make sure that you’re hitting all of them at once and you’re not neglecting any of them.
So, it might mean less going towards those super longterm goals if you’ve got other stuff on your plate first. And over time you begin to increase that amount as it becomes more appropriate to your situation. But there’s more nuance that goes into this than people tend to think about, and it doesn’t need to be one or the other. You think of it in terms of “all right, what can we save right now? What percentage of our income can we save?” And then think of that as a pie and then divide that pie up in terms of “all right, I can afford to save X per month. So, of that X, I’m going to take 30% of it and put it in the house fund and I’m going to take another 30% of it and pay down my student loan debt with it. Extra. We’re going to expedite that. And then, the remaining 40% I’m going to channel towards my retirement savings.”
And I think that is more appropriate than not doing any of it because you claim to not be ready. It’s also more appropriate than channeling 100% of it towards retirement savings when you haven’t done the other stuff, first. The cursory steps first.
Tim Mullooly: It’s a lot to think about, but it isn’t crazy. You just need to sit down and really identify what it is you’re trying to do. And the advice to begin, like I said, sooner rather than later with your investing is probably good advice. You just want to make sure that you’re approaching it in the right way with inappropriate amount of your money so that you’re not putting yourself into a potentially bad spot down the road.
Brendan: Right. Yeah. And along the same lines of young people putting money into their 401ks at work and not really thinking about it long term if they’re going to need the money, there was an article in CNBC as well talking about the hidden cost of your 401k.
Tim Mullooly: This headline was crazy because people are totally going to click on it. It’s like, “What? Am I losing money or making a mistake? What hidden costs is there to my 401k?”
Brendan: Yeah, and the hidden costs that they talked about was that if you put your money in pretax in a 401k, it gets taxed on the way out. For us as advisors and financial planners, that made me shake my head a little bit. I was like, “That’s not a hidden cost. That’s …”
Tim Mullooly: That’s on the label.
Brendan: Yeah, exactly.
Tim Mullooly: That’s Day 1 stuff for a 401k.
Brendan: A lot of people do not understand that, though. Or they just weren’t told about that when they began using something like a 401k through work. And so, people do tend to forget about taxes. If you have $1 million in something like a traditional IRA or a 401k, it would probably be wise to think of it as some lesser amount than that like 750,000 or 800,000 because you are going to owe taxes whenever you take distributions from the account. And depending on how much you’re taking and what other income you have, you’ll determine which tax tax bracket you then fall into. Hopefully, it’s lower than when you put the money in pretax. That’s the idea.
Tim Mullooly: That’s the premise, yeah.
Brendan: You need to think about these things because it does make a difference in terms of what you actually have to live off of if that’s what you’re pulling money for.
Tim Mullooly: Yeah. And I think before we turned the mic on, we were talking about this article and we were going back and forth on “well, is it the employer’s fault for not educating these employees? Or is it the employee’s fault for not seeking out this information and fully understanding their retirement plans and all the features that go along with it?” We didn’t really come to a clear cut answer. It’s either one or the other’s fault.
I think it’s on everyone’s shoulders to an extent. As an employee, I think, you’re an adult. Money is coming out of your paycheck every month, every couple of weeks to go into this account. I personally would want to know, “Okay, how does this work ?” Right. And to an extent for the employers, just as an outsider standpoint, I would hope that they would take some responsibility in trying to educate their employees, but that’s not really their job description either.
Brendan: Obviously, everybody needs to understand what they’re doing with their money. Sometimes people are surprised when they learn what we consider to be basic features of something like a 401k plan. I wonder if it really is surprise or if people just … It’s never nice to learn that you have to pay taxes on anything.
And so, everybody tends to grumble about that and maybe we pretend that it’s a hidden cost we were unaware of when in reality, we knew that or were told about that at some point.
I don’t know necessarily if there’s anybody at fault, but it’s just something to be aware of and it’s probably … I don’t know. Maybe we could help it in terms of framing. When when you have a pretax account that is going to be taxed when the money comes out, maybe it should be reported into amounts. Like I said before, if you have your million dollar 401k, you could tell them what tax bracket you’re in and they could be like, “All right, well, this is an estimated $750,000 then net when you actually decide you need this money.”
Tim Mullooly: Right.
Brendan: Tough to do because it depends on what increments you’re taking it out in. Obviously, if you took it all in a lump sum, you would be in a very higher tax bracket. If you take it out in small increments and you don’t have much other income when that happens, maybe you just have social security and you’re taking small distributions from a 401k or an IRA, then maybe you’re not paying that much in tax anyway. But it’s something to consider and it’s definitely not something to ignore when it comes time for distributions. Definitely don’t just not withhold on your distributions. That is an error.
Tim Mullooly: Yeah. That’ll come back and bite you.
Brendan: Yeah. You’re just going to have … you’ll have to pay the taxes eventually. There are very few people who take distributions from accounts like these who don’t end up owing something. And hopefully you have a good advisor who can help you come up with the correct amount based upon other income that you’re going to show. You got to plan for these things.
Tim Mullooly: Yup. I think this was one case where a click bait headline actually was a good thing.
Brendan: Yeah, maybe it’ll get people to pay attention.
Tim Mullooly: Last article that we wanted to talk about real quick. I think, Brendan, you said it had to deal with social security and how to think about social security in terms of your portfolio and your assets.
Brendan: Yeah. And this is a point I’m not sure if we’ve touched on in the podcast before, but it’s a-
Tim Mullooly: … big pet peeve of Brendan here.
Brendan: Yes. Pet peeve. The blog post was from the Oblivious Investor. It’s a guy named Mike Piper, who is a CPA and a CFP. He writes really good stuff, and in this one he had seen on a message board somebody talking about “is social security and asset on the balance sheet, yes or no” and “is social security a bond, yes or no?”
And so, he took a stab at both of those questions and I pretty much agreed with what he had to say about it.
Tim Mullooly: So, what were his thoughts?
Brendan: He said that social security is an asset, even though it’s not liquid. You can’t sell your social security to somebody else. [inaudible 00:17:12] that means. But we put illiquid assets on a balance sheet all the time like maybe a house or a closely held business, an annuity that you’re going to collect a stream of income from in the future.
So, that that doesn’t matter. It’s still goes on there, even though it’s as illiquid you can get. You can’t sell this to anybody. But so it’s an asset, but it is definitely not a bond.
Tim Mullooly: Now what do you mean by, is it a bond? Is that just a mindset of how people think about social security?
Brendan: Yeah. So, sometimes we hear this about social security or pension income that people stand to collect in retirement. And they’ll say that they consider whatever the income payments are that are guaranteed over their lifetime or a period to be part of their bond allocation in the portfolio and then they try to base their other investments off of the fact that they have X coming in pension or social security income per year.
Tim Mullooly: Now on paper that that sounds like a decent idea, but what do you think is the issue with that?
Brendan: I file that under the category of things people say during a bull market because while you could do the math and say, “If I have this per year in income coming from social security and that would mean to to throw off that income, that would mean X hundred thousand dollars in a bond investment in bonds … they’re not going to do the same … they’re not going to perform the same functions that actually having the bonds would.”
The big reason that we have bonds in client accounts is not because they throw off whatever percent in income each year. It’s more so to lower the volatility of the account and to balance out some of the risks from the stock side, not so much to say we’re collecting our two or 3% income on these investments.
Tim Mullooly: So, having that social security as your bond portfolio would essentially do the opposite of what a bond in your actual portfolio would do in that sense of lowering the volatility because if you have your social security as a “bond,” then your actual investment portfolio is going to be have more heavily weighted to stocks, which means when the market fluctuates, you’re going to get all of that.
Brendan: Right. It’s really just mental accounting. It’s how you want to think about it. I do not recommend thinking of social security or pension income as part of your bond allocation because I don’t really think that people can handle it and I don’t think that it serves the same purpose.
And something that Mike said in this blog post was that not everything is a stock or a bond. You have stuff on your balance sheet like a house. Your House isn’t a stock because the price of it goes up and down over time. It does. It Fluctuates. It’s a house. It’s not a bond either because you don’t have to pay rent and you just pay your mortgage.
It’s not a stock, it’s not a bond. It’s a house. A house is a house, and your social security is social security. It’s not a bond. It’s not a stock.
His recommendation, which is the approach that we take here, this is just the fundamentals of what we do for clients. Instead of thinking of your social security income like X% in bonds in your portfolio, you need to just go through basically the financial planning process. You figure out what you’re going to have from social security, from pension income, from maybe part time work that that you’re going to do in retirement.
Take that number, figure out what you need on a month-to-month basis, and whatever the gap is between those two numbers is what you’ll need to withdraw from your portfolio to live on. And then take that amount and you can kind of back into what makes sense in terms of how much to have in stocks and bonds in your portfolio based upon that.
And I think that will most likely align your portfolio a lot closer to your situation than just saying like, “Well this is the bonds and then we’re going to do whatever else. Yeah, it just seems like a more neat way to do it. And you can manage the total portfolio of stocks and bonds for total return, not select investments based upon their yield only. I think it just leads to a cleaner portfolio that just makes more intuitive sense. It’s a simple process.
Tim Mullooly: It seems like a more realistic, human, real life application of a way to construct a portfolio because it’s on paper, yeah, you could think of social security as a bond. But in the real world, not many people are going to be able to be okay with that when the market starts going up and down and their full stock portfolio is going crazy.
So, it’s what you laid out and what he laid out is much more a realistic application of social security.
Brendan: No doubt.
Tim Mullooly: That’s going to wrap up episode number 258 of the Mullooly Asset podcast. Thanks for tuning in, and we’ll catch you on the next one.
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